Companies often spend weeks or months developing an annual plan or budget, but by the time they’re finished, the market has changed and the budget has become obsolete. There’s a better way: rolling forecasts.
What is a Rolling Forecast?
Instead of being once-a-year exercises, rolling forecasts happen on a regular cadence. Unlike budgets that may have hundreds or thousands of line items, they focus on key business drivers. And rather than focusing on the past, rolling forecasts act as early warning systems when you’ve drifted off course.
We’ve identified five best practices and steps to launch rolling forecasts successfully at your organization:
Step 1. Use a dedicated application—don’t try to perform them with spreadsheets.
The multiple versions required by good rolling forecasts to create different scenarios are extremely difficult to perform and manage with spreadsheets.
Step 2. Model your course on drivers, not details.
Your annual budget lists thousands of line items, but to follow rolling forecast best practices, you should be creating forecasts at a higher level. Focus on significant business drivers such as risk, profit, and working capital.
Step 3. Use rolling forecasts to sound out multiple what-if scenarios.
Look for a tool that lets you change a few key assumptions and drivers and instantly see their effect on the overall plan, such as the impact a price change has on headcounts and cash.
Step 4. Scrub your forecasting process of bias—don’t link it to targets, measures or rewards.
Rolling forecasts are a strategic management tool, not an evaluation tool. Let managers forecast based on real business demands and the real business environment.
Step 5. Choose the right forecasting horizon for your industry.
A best practice is to forecast at least four to eight quarters past the current quarter’s actuals. But there’s no hard-and-fast guideline for the time interval included in a rolling forecast. It depends on your industry, your business needs, and how long it takes to make decisions.
But let’s say you aren’t convinced about the need for rolling forecasts in the first place. There are several compelling reasons for giving them a try:
- They enable agile responses to changing market conditions
- They optimize decision-making for better planning
- They identify future performance gaps
- They help senior executives manage performance expectations
- They shorten long planning cycles with a more efficient model—and direct the extra time toward more strategic activities
That’s not to say that implementing this approach will be smooth sailing. Some people fear that they will take the focus away from company goals. But in fact, rolling forecasts ensure that these goals are realistic because you’re continually updating your plan and tracking performance against them.
For example, say your annual budget was $100 million. If rolling forecasts indicate that you’re going to fall short of that figure due to external headwinds, you can work to get management’s buy-in for a more realistic outcome and make decisions to change your investment levels or key priorities.
Our CFO Indicator Q3 2017 survey explores CFOs’ confidence relative to data and technology, as well as their progress in moving toward a “single source of truth” (single source of financial and operational data). Results reveal that Finance has successfully cleared what we believe to be one of the most significant hurdles—their hesitancy to store data in the cloud. Read our other CFO Indicator reports here.