Create a solid foundation for financial planning with rolling forecasts
The objective of budgeting is to create a continuous financial plan, usually for a fiscal or calendar year. These plans guide resource allocation, inform strategy, and allow companies to evaluate performance.
Budgeting is typically a bottom-up process that likely looks familiar. It begins with each business unit or department drawing up its budget. To ensure they can hit their targets, managers often lowball revenue and inflate cost projections. Executives know this, and challenge draft plans.
After months of negotiation, plans turn into commitments signed off by everyone. Consequently, the budget is outdated before the ink is even dry, and has no reasonable chance of being accurate.
Even if budgeting took a fraction of the time it usually requires, traditional budgeting can only work in a world of stable markets, static costs, and predictable inflation. With constantly changing market conditions and black swan events, producing reliable static budgets that can be used as a roadmap and performance benchmarks isn’t really possible.
Enter rolling forecasts.
Our guide to rolling forecasts provides an overview of the rolling forecast process and how it differs from traditional budgeting. We also delve into the pros and cons of rolling forecasts and look at the steps you need to take to implement a rolling forecast that will add value to your company.
A rolling forecast budget provides companies with live financial plans updated in real-time to respond to internal changes and external events. It’s a process that forecasts a business’s future performance over a continuous period. There is no fixed budgetary period but a continuous “roll.” When each week, month, quarter, or another period relevant to the business ends, you record that period’s numbers and add another term to the end of the forecast.
A 12-month rolling forecast gives you insights well past the traditional annual budget time frame. This is because the dates on which the budget starts and ends are artificial constructs in the first place and may be completely irrelevant in the context of sales seasonality, project timelines, and other business factors.
Do not use static budgets if you’re looking to set targets or conduct forecasts in a constantly changing business environment. Managers need to be able to react by changing plans and targets to reflect current reality.
When comparing a rolling forecast vs. a normal forecast, rolling forecast budgets offer a more realistic and iterative planning process. They provide companies with a live financial plan updated in real-time to respond to internal changes and external events. Financial managers can use these changes to more efficiently and effectively plan and reallocate resources as necessary.
Using a rolling forecast approach takes companies from a backward-looking variance analysis at the end of the budget period to a forward-looking variance analysis that promotes faster adjustments. Rolling forecasts make use of historical financial data, the latest market conditions, and up-to-date understandings of evolving risks and opportunities. This makes rolling forecasts a powerful FP&A tool when used correctly.
While rolling forecasts provide numerous benefits and are a valuable way for business to plan their financial decisions, they’re also known to have a few drawbacks. By contrasting the pros and cons of rolling forecasts, and anticipating the common rolling forecast mistakes, your team can be better prepared to make the successful switch to the rolling forecast method.
Below we compare the main rolling forecast advantages vs. disadvantages to be aware of.
Many companies have eschewed the traditional budgeting process and replaced it with rolling forecasts. They offer not only a more realistic view of a budget, but they’re also more flexible.
Below are the top benefits of rolling forecasts for business budgeting:
Since rolling forecasts recalibrate budget information regularly, they’re far more reflective of what’s happening within the business, making them more useful for strategic decision-making.
If rolling forecasts are so powerful, a natural question is, why haven’t they always been the standard approach to budgeting?
There are a number of challenges preventing companies from adopting a rolling forecast approach. For the Finance team, these challenges are largely logistical and process-related.
Consider the following challenges of rolling forecasts:
Beyond Finance, adopting a rolling forecast only makes sense for the broader business if it’s able to adjust in response to what it learns.
In some cases, adjustments might be easy. For example, it’s not hard to change the content of Google ads or adjust pricing on digital goods. In other cases, it may be impossible or irrelevant, such as with capital investment in a microchip fab or oil refinery, which is a multi-decade decision. However, most tactical or strategic business changes are somewhere between these extremes.
If you’re implementing rolling forecasts for the first time, make sure you apply the best practices below.
Our best practices can give you confidence in your projections and help you overcome the practical difficulties in converting the promise of rolling forecasts into reality. Where applicable, we’ll highlight these in the rolling forecast template we’ve created.
The first step toward implementing a rolling forecast is to set the goals you want the forecast to achieve.
Objectives shouldn’t be pie in the sky, like forecasting to the nth degree of accuracy. Instead, they should be attainable goals, such as improving sales revenue, profit margin, or cash flows.
There are two components to establishing financial forecasting time frames. The first is how many months out you need to forecast. The answer to this depends on how sensitive your company is to changing market conditions and the length of your business cycles. A company susceptible to market conditions and operating in a highly cyclical industry should forecast across the shorter term, typically 12 months. Companies less sensitive to these factors will forecast 18 to 24 months out.
The second factor is how often your forecast will roll over. Put differently, how often do you need to re-forecast your budget? This frequency is usually monthly or quarterly. For established businesses, only a quarterly rollover is usually required. For high-growth companies operating in a disruptive space, a shorter cadence is better to remain agile to new trends and market conditions.
In our template, we selected a monthly cadence. If we are in January 2023, we have already entered our historical volume and price data up to December 2022. From this point (Column: U), the rolling forecast is performed. As actuals for each month become available, we enter them in the relevant column, and the forward-looking forecast is continuously updated.
In any forecasting model, you should minimize the number of assumptions. When designing your forecasts, remember to apply the keep it simple (KIS) and Pareto’s 80/20 principles when setting assumptions.
Limiting the level of detail to only what’s necessary can help you make better use of your rolling forecast data, helping you to apply it in more practical ways.
Unlike static annual budgets that list each line item, rolling forecasts are driver-based. They work backward from financial and operational metrics, tracking the critical KPIs that impact business performance.
For example, our rolling forecast example template shows a sales forecast. The drivers we chose were volume, price, and sales growth.
You might find other drivers that help to forecast revenue, like market share or macroeconomic GDP data. The best way to approach this is to ask what your business goals are, which driver line up with them and from which sources can we find relevant data? For a more in-depth guide on sales forecasting, see our Guide to sales forecasting in Excel.
Rolling forecasts are only as good as the data they use. Since rolling forecasts plan for scenarios at the enterprise level, data is stored in different systems. For example, yours might require frequent imports of actuals from your ERP systems or bank file downloads.
For this reason, it’s critical to standardize the data into a specific format before you use it. Further, if you do this process manually, there is a greater chance of using inaccurate data in your forecasts due to human error.
While it remains the workhorse for many Finance teams, Excel cannot perform rolling forecasts effectively. You might have already realized this when you read through the steps in creating a rolling forecast. The functionality that rolling forecasts require far outstrips the capability of Excel spreadsheets.
The most constraining limitation is the manual effort that Excel requires. This has implications for how data gets imported from different systems and how you use it to construct scenarios for what-if comparisons.
Real-time data is the coal face of rolling forecasts. Updating data in spreadsheets is not a simple task. It is time-consuming and prone to human error. Indeed, if you use Excel for forecasting, you’re effectively using spreadsheets as your database. As your databases grow, your spreadsheet grows too and becomes slow and prone to crashing.
Another spreadsheet-related pain point is that rolling forecasts require additional scenario analysis to understand the impact of major or minor alterations to the plan, run the plan against different drivers, and perform variance and sensitivity analysis.
While VBA does give Excel a leg up in the automation department, it requires significant programming knowledge, even for a basic forecast. Because VBA code refers to variables in the spreadsheet’s cells or ranges, if you extend periods and change the cell reference of key drivers, you need to update the cell references in the code itself, otherwise, the model breaks.
A rolling forecast model is a powerful tool for FP&A teams. It gives the agility to reallocate resources promptly and avoid potential adverse effects on your company due to shifts in the economy, industry, and the organization itself.
As we’ve noted above, moving towards more successful rolling forecasts is heavily dependent on data and data-driven processes. But without dedicated software, there is a high chance of incurring costly errors during rote annual data entry.
A company compounds its risks when relying on manual procedures when maintaining rolling forecasts. The model owner is required to open a spreadsheet at the end of every month or quarter and manually remove that forecast period before adding a new forecast to the end of the financial model. This happens before updating all the financial projections and is a risky way to do business.
Don’t let rolling forecasts roll over you. Turn to specialized software to remove the capacity for human error to creep into your forecasts.
With OnPlan, you can build a rolling forecast that allows you to automate much of the data collection process and quickly update each driver, making your forecasts as accurate as possible. Click here to see OnPlan in action. Or schedule a demo with us by clicking the button below.Book a Demo
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