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Rolling Financial Forecasts The Need

These days most FP&A teams have thrown away their traditional static budgets in favor of modern rolling financial forecasts which give the ability to continuously plan.  The budgeting process should not be an arcane annual ritual, written in stone, but needs to be monthly and collaborative.  The static budget planning process means that nothing changes in the plan, even if sales are down by 15% year-to-date through April. Once your rolling forecast is established, you will benefit from a model that reflects the real-time opportunities and challenges facing your business.

Rolling Financial Forecasts

Rolling Financial Forecasts The Technique

The key to setting a successful rolling forecast process is to ensure that you are modeling in a driver-based environment – whether excel or a modern FP&A software application.  First, you need to define a specific time horizon.  In most cases you will want to do this for at least a 12 month period, with a 3 to 5 year window as your maximum.  

At the close of each month, the FP&A team should perform a budget to actuals variance analysis.  Based on the deltas, the team should re-forecast the forecast period of the model. 

The rolling forecast requires an interlinked financial model with integrations into the key financial and operational data sources, for example, Quickbooks (QBO) and Salesforce.

OnPlan’s Capabilities for Rolling Financial Forecasts

The video below highlights OnPlan’s strengths for Rolling Financial Forecasts:

  • Driver-based: OnPlan uses a driver-based modeling approach. 
  • Budget variance Analysis (BVA): BVA is a native function on all OnPlan sheets
  • Push Button Roll Forward: Roll your model forward and bring in actuals from Quickbooks and salesforce with a single push button roll forward
  • Data Integrations: Integrates with Quickbooks, Salesforce, and many more key platforms.

Rolling Forecast Best Practices

The best practices that we are outlining here, are written with small to midsize enterprises in mind.

Best Practices to Minimize the possibility of errors in your Rolling Forecast

  • Models should allow for monthly roll forwards at the push of a button. Limiting the number of columns and formulas that need to be copied over is essential in reducing the risk of introducing errors.
  • Avoid using hard-coded values in cells.  All assumptions should be delineated.  This is for the same reason as above, hard coded values almost ensure that you will end up with errors in your model as you or the next person making use of your model will eventually forget about these “landmines” in your model.
  • You will most likely need to adopt a financial forecasting software package to streamline your roll forward process. Keeping multiple scenarios and versions in sync in Excel is challenging.
  • Have one owner of the roll forward process.  This is the only person who should be allowed to roll the model forward.  Having multiple cooks in the kitchen will spoil the soup.

Best practices to ensure Accuracy of your Rolling Forecast

  • You should be rolling forward based on adjusting key drives in your business such as Marketing Qualified Lead volume or close rate or price per unit.  THis should be done as opposed to simply hardcoding revenue or deals into your model.  For example, you should adjust the number of hours of professional services billed to clients rather than just saying it will grow by 5% next month. The benefit of using the driver-based approach is that it gives you more flexibility and control over the metrics.  If you miss your target next month you will know: was it because you didn’t sell enough units or is it because you converted too few customers?
  • Make sure you have the right degree of granularity in your model.  Revenue should certainly be broken into its core drivers.  But, for items like legal expenses, it may be sufficient to simply use a trailing three month average of historical expenses.

 

Using Variance analysis in your Rolling Forecast

Making use of variance analysis is a critical aspect of your rolling forecast.  This allows you to know how good your assumptions have been historically, and to adjust them on a go forward basis.  In a nutshell, you are comparing your predictions against actual results.

Below you can see an actual screenshot from OnPlan’s platform that shows how the actual results (the columns below the white headers) compared with the forecasted results (the blue shaded columns).  

Rolling financial forecasts

Rolling Forecast Pitfalls to avoid:

  • Rolling forecasts will be inefficient if the model is not setup for push-button roll forward.  It is worth taking the time initially to reduce manual touch points. 
  • There should be one owner of the model
  • You need to pull data from the source of truth.  
  • Your Salesforce and Quickbooks will not agree. That’s ok. 

 

In Summary

Setting up your company for running a monthly rolling reforecast will take some upfront effort and investment.  However, as your business becomes increasingly complex over time, you will be thankful that you have made that investment.  You will have a consistently realistic forecast that you can review and your variance to plan will be minimized.  Over time you will see a tremendous return on investment from establishing your rolling forecast model and process.