The CFO'S Perspective

Do You Need to Switch to a Rolling Forecast?

how-to-create-a-rolling-forecastIf you’re wondering whether your company needs to switch to a rolling forecast, it’s important to look at why you’re asking. The simple act of questioning whether your current budgeting process is sufficient likely indicates that you have identified a shortcoming in your current budgeting process that provides an opportunity for improvement. Moving to a rolling forecast may offer benefits over your existing methodology, but it’s important to understand the pros and cons associated with using a rolling forecast and what to be aware of when considering switching budgeting methods.

How are Rolling Forecasts Different from Regular Budgeting?

A rolling forecast is a continuous financial process that does not adhere to a set budgeting cycle. As the name would imply, rolling forecasts utilize a constant feedback loop where actual results are continually used to adjust forecasts in an attempt to improve accuracy and increase financial visibility.

By taking results and using them to adjust projections in real-time without the lag of being tied to a fixed fiscal period (quarterly or annually), rolling forecasts are typically more responsive to changing market conditions. As a result, a rolling forecast may improve strategic decision-making over static budgeting, making the organizations that use them more agile in today’s rapidly changing economic environment.

The Pros and Cons of Using Rolling Forecasts

Rolling forecasts allow companies to:

  • Respond to industry/market changes and consumer trends
  • Adapt to new regulations
  • Keep pace with growth
  • Capitalize on available opportunities
  • Increase business agility and adaptability
  • Improve strategic decision-making
  • Identify areas for financial improvement
  • Mitigate risk as a component of multi-variate scenario planning

However, despite their many benefits, not all companies have switched to using them. Why? The key reasons that finance leaders opt not to adopt a rolling forecast model are because they can be:

  • Misleading
  • Time-consuming
  • The wrong approach for the circumstance

Now, you may be asking, “If a rolling forecast is so responsive to market forces and adaptable to business changes, how can it be misleading? Wouldn’t a static forecast be more misleading because it doesn’t take current factors into account?” The answer is that when the original budget is abandoned, a company can lose track of initial expectations and the entire basis for the initial budget. Therefore, when an organization’s forecast is trending down, it can find itself validating reduced performance.

Additionally, while financial technology automation has made rolling forecasts much easier to create these days than they were previously, there is work involved in setting up this capability. And, as is often the case, there is resistance to change among accounting/finance staff and executive leadership to overcome as well. Both can combine to make switching an arduous and time-consuming task.

While rolling forecasts may be used under a specific set of circumstances, they are not right for every industry, business type, or stage of business. So, while a rolling forecast may be helpful during, say a severe economic recession, they are not considered a best practice across the board.

How to Develop a Rolling Forecast

If you decide that creating a rolling forecast is right for your organization, use these steps to get started:

  1. Get Buy-In

Communicate the change – explain what is required and what the company will gain from it.

  1. Create Clear Objectives

Understand what you want to get out of it – the problems you are trying to fix and the benefits you hope to gain. Then, revisit these objectives again later in the process to ensure you are meeting them.

  1. Decide which Metrics to Use

Know what you want to track (revenue, customer acquisition cost, gross margin, total expenses, etc.) and which benchmarks you will use when doing so.

  1. State Financial Assumptions

Indicate all assumptions and methodology being used so that if changes need to be made to either, that can be clearly communicated.

  1. Select an Appropriate Time Horizon

Determine the period of time you want to forecast for – 4 months, 6 months, 12 months, or more – keeping in mind that the longer the forecasting timeframe is, the less reliable it will be.

  1. Identify Key Drivers

Establish which drivers are most critical in influencing the company’s financial performance – pricing, market demand, etc. Focus on these drivers as the foundation for creating your rolling forecast.

  1. Leverage Technology

Let your technology do the work for you. Use FP&A (Financial planning and analysis) software to streamline data integration and utilize reporting automation to get up-to-date forecasting as soon as financial changes occur.

  1. Include Actual Data

As the company’s finances change (both positively and negatively) continue to include real-time actual data to get new forecasts and better inform ongoing decision-making.

  1. Do Scenario Planning

Use rolling forecasts to inform long-term business planning initiatives. When doing scenario planning to prepare for potential economic, environmental, or technological disruptions, include rolling forecast data to better inform strategic planning.

  1. Get Input from Key Stakeholders

Share rolling forecasts and get input from key stakeholders to better engage them in high-level decision-making and align their goals. Determine if there is anything that is not currently included that they need to do their jobs more effectively and try to include it in future forecasting efforts to maximize value across the organization.

  1. Analyze and Adjust

The benefit of a rolling forecast is that equips leadership to constantly analyze their numbers and adapt to what they are seeing. Use a rolling forecast to its potential by leaning on it as a roadmap to achieve business goals.

When you need strong financial leadership, our team of experienced CFOs can come alongside your organization to improve budgeting and forecasting. Whether you are changing budgeting methods or looking to improve forecasting to help overcome new challenges, we have the CFO services to help. We can offer part-time financial leadership, CFO consulting, or a formal financial assessment to help your company get its bearings. Drop us a line today to let us know how we can help!

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Topics: Analysis, Cash Flow, Budgeting, Forecasting, Financial Process

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