Improving Planning Precision by Implementing Rolling Forecasts

The annual budgeting process implemented in most companies is based on the rigorous work of many employees across all business functions, who plan, input, aggregate, approve and analyze budget data in order to derive the most precise budget for the forthcoming year.

The process includes filling in many spreadsheets with input forms?and preparing the presentations leading to a few rounds of negotiating numbers to adjust specific P&L lines to match the targeted financial result.

However by definition, a budget is not the same as a plan, it is only one of the somehow probable scenarios of future outcomes and may be not the most likely one.

So much time is spent on the budgeting process due to its iterational nature involving many rounds of changes before arriving at the final result. Though the time spent creates an illusion of reliability of budgeted numbers, in fact, it’s quite the opposite: each iteration decreases the precision not only due to the calibration of the parameters to what is expected but also due to the time passed between the first and the final versions of the budget.

One of the more advanced approaches to planning is using a rolling forecast process.

This approach suggests that the parameters of the business are adjusted and predicted using various instrumental approaches on a perpetual basis. The application of this approach doesn’t involve limiting the budget with a financial year and updating it periodically. Instead, it looks at least one year ahead of each current date.

Imagine a company budgeting for the next year in quarterly instances. A traditional budget shall account for the four fixed quarters in this case. If there are no corrections to the budget, the budgeted number shall remain stable by the end of the year. And the following year shall be budgeted say in the 4th quarter of the current year. This allows management to use a longer horizon that never shortens or breaks for planning and risk analysis, adjusting subsequent periods based on actual data. As a result, the overall quality of management decisions is improved due to a more accurate prediction of future changes.

In the rolling forecast approach, a fresh quarter is incorporated into the budgeting process after the completion of the previous quarter. The first added quarter in this example is highlighted with a star.

The following image demonstrates that each cycle encompasses four consecutive quarters as it transitions into new time periods.

Although this approach has been around for a long time and evidence has been collected on the effectiveness of rolling forecasts, some companies still use the outdated annual budget approach.

Here are the five primary factors contributing to the annual budget's consistent defeat against the unquestionably superior rolling forecast:

1) Enhanced Efficiency and Resource Optimization

The conventional annual budgeting process demands excessive time and labor, depleting significant company resources to reach its finalization. Conversely, rolling forecasts offer an ongoing and continuously updated approach throughout the year, requiring less time and labor investment.

2) Heightened Data Quality and Precision

The annual budget essentially relies on educated estimations, encompassing inherent risks of inaccuracy. In contrast, high-performing organizations mitigate this risk by continuously updating (rolling) forecasts to accurately reflect current business conditions, resulting in improved data quality and precision.

3) Flexibility and Responsiveness

Rolling forecasts enable companies to have real-time updates on financial metrics, making them twice as likely to have timely information. Additionally, these forecasts empower business users to create their own reports independently, reducing reliance on IT. Recognizing the evolving role of financial leaders as strategic business partners, rolling forecasts focus on looking forward instead of dwelling on past data.

4) Extended Outlook and Continuous Planning

While annual budgets typically forecast only for the upcoming fiscal year, rolling forecasts maintain constant movement and updates as each month progresses. This ensures that companies always have access to a clear and up-to-date picture of the future, beyond the limitations of the fiscal year.

5) Tangible Business Outcomes

The most remarkable aspect of rolling forecasts is their ability to produce concrete results, manifesting in revenue, profits, share price, and even credit rating. This dynamic forecasting process translates into tangible and measurable business outcomes, offering a distinct advantage over traditional annual budgets.

Challenges in Implementing Rolling Forecasts:

1. Additional Investments:

Introducing rolling forecasts may necessitate additional investments in terms of both time and financial resources. This could involve acquiring suitable technology, providing training to employees, and allocating extra time for establishing and maintaining efficient processes. Justifying these additional expenditures may be necessary to ensure the success of rolling forecasts.

2. Company Culture and Senior Management Support:

The effectiveness of rolling forecasting is contingent upon the support and participation of senior managers within the organization. However, implementing rolling forecasts means adding to their already busy workload, as they need to update their forecasts on a rolling basis. Convincing senior managers of the benefits, such as the ability to request funding throughout the year, can help gain their support and alignment with the process.

3. Data Quality and Availability:

Rolling forecasts heavily rely on a continuous flow of accurate and reliable performance data. This data is crucial for comparing actuals with forecasts and ensuring that plans remain on track. However, many companies face challenges in obtaining clean and actionable data, which can hinder the successful implementation of rolling forecasts. Striking a balance between waiting for perfect data and utilizing available data effectively becomes important in this context.

It's important to address these challenges proactively and develop strategies to overcome them when introducing rolling forecasts in an organization. By recognizing the potential hurdles and taking appropriate measures, companies can maximize the benefits and effectiveness of rolling forecasting.