In a previous blog, I wrote about how zero-based budgeting could form the first step in transforming the Office of Finance’s FP&A function and processes. This key tool aids in evaluating current corporate spending and investments, but it also lays the foundation for evolving the budgeting model from a static to a rolling forecast. This transition from a somewhat static to a highly agile organization is necessary for business success, especially in challenging times. Let’s dig deeper into what it means to have a rolling forecast and the technology enablers to drive its success. 

What is a Rolling Forecast?

It’s easy to see the appeal of having a rolling forecast. The outlook is updatable at any time for any horizon (6, 12, 18, 24 months, whatever your organization chooses). For illustration, assume Company A has adopted a rolling forecast that forecasts each month over the next 12 months. One of those forecasts, through no extra effort, is defined as the budget. This is one of the theoretical selling points of the rolling forecast concept – that another (rolling) forecast replaces the hectic and time-consuming budget process. Let’s say that happens in November. As 2021 unfolds, a revised forecast runs at the end of each month throughout the next twelve months. The traditional forecasting process only extends to the end of the current fiscal year. Rolling forecasts provide greater visibility into an extended time horizon. If it’s accurate, it can help an organization prepare properly for “what’s around the corner” and mobilize more effectively.  

The graphic below illustrates the time horizon flexibility of a rolling forecast versus one limited to the current fiscal year. 

You can see how the rolling forecast approach, outlined above, delivers a continuous, evolving 12-month forecast. Put another way, as a company progresses throughout the year, it simply adds another month’s worth for forecasting.  Compared to a traditional process that restricts forecasts to the current fiscal year and looks at a continually shorter time horizon, rolling forecasts continue to provide visibility into the next 12 months (in this example). If those forecasts are accurate, that additional visibility can drive considerable business value. 

A rolling forecast, if well designed, can be a powerful management tool that allows organizations to weather the ebbs and flows of potential – perhaps inevitable – market turbulence by allowing faster adjustments given the additional foresight. But building and constantly updating a rolling forecast comes with its challenges if the organization lacks the proper automation and discipline to facilitate it.  

Why your budget (or plan) and forecast process may be fundamentally wrong 

The typical budgeting process is often an annual exercise in crystal-ball gazing, beginning as early as month 8, with multiple iterations before a final plan is agreed come month 12. Traditionally, management starts by reviewing the 3-5 year strategic plan, with target-setting for the company’s revenue and expenses. In many companies, these targets then go “over the fence” to the tactical and operational teams. Department managers plan for their expected revenue (if applicable), headcount, CapEx, and expenses. Typically, the FP&A team coordinates all this activity and assesses working capital requirements, developing cash forecasts, and so on. 

This annual exercise can grind up significant company resources, often at the expense of other vital activities. The result is a finalized budget in December that started back in August. In some companies, this is the only company-planning exercise, and if that’s the case, there are significant issues:  

• As good as the plan is, it probably won’t account for surprises like a ransomware attack on operations or cargo vessels blocking the Suez Canal, forcing a sudden re-evaluation of their short-to-medium term impact scenarios. Of course, those are examples of major surprises. Still, there is likely to be a handful or more of minor surprises that, taken together, can have a significant impact on the business (e.g. a supplier going bankrupt, a key customer acquisition by another company, or a spike in the price for a key raw material). 
• Many managers apply a “cushion” or “padding” to their budget assumptions given so many unknowns. While no one of those may pose a problem, it’s the cumulative effect of multiple layers of “buffers” that can distort a budget and lead to questionable strategic decisions. 
• Without an opportunity to update the budget in the form of a forecast, people will be held accountable for outdated assumptions. In addition, variance analysis will continually have the “noise” of obsolete comparisons. 

In some cases, a company with a traditional planning process may update with quarterly forecasts and, in that sense, not be tied to a static budget. That’s a good step forward. However, as previously discussed, this commonly lacks visibility beyond the current fiscal year. 

Digital transformation can enable your Rolling Forecast 

The number one reason why companies don’t embrace rolling forecasts is that they can be simply unmanageable using traditional spreadsheets. So what are the requirements for a rolling forecast system? 

At a high level – a fully integrated platform encompassing financial and operational planning, reporting, and analysis to enable straight-through processing. 

From an administrative side – setting up a new forecast should be as simple as checking a box for each month included in the forecast (and each relevant month of actual results). The system itself would then create the necessary input forms accordingly. 

In addition, the system needs to be able to automate the process of pulling the data required for a forecast from multiple systems, then staging the data as needed. This prevents any need for CSV data dumps and manual transformation. 

Likewise, the system should accommodate the use of drivers so that a change in a key driver automatically updates the impact on the P&L. 

The goal is to drive easy and active business decisions, which improve an organization’s financial, operational, and reputational positions. 

Some additional considerations include: 

• What is the forecast time horizon that your organization requires? If you do a forecast in month 6 of the current year, and your rolling forecast horizon is 18 or 24 months, you already have the budget for next year. But if, in practice, your company still wants to do a deep dive budget in addition to the rolling forecast, then perhaps you’ll only need a 12-month rolling forecast.  

(Note that this dependence may also hinge on factors such as industry type and when returns on investments are expected, balanced with the knowledge that a longer forecasting horizon means less accuracy in future months, so the usefulness becomes less effective). 

• Should you do a rolling forecast every month or once a quarter? Ideally, of course, you should be able to trigger a forecast whenever it’s needed. Still, most companies have a planning calendar, and the frequency of the formal forecast will depend on the company’s sensitivity to market conditions. 
• What drivers are well known and in place, and which new drivers should be considered?  Should the driver calculations be something a user can modify or be locked down?  
• Do you need the ability to speed up your organization’s financials closing process, to begin the forecast cycle earlier rather than later? 
• Is it easy to report on and visualize the variance of the current forecast against plan and actual to prior forecast? Visualization capabilities have proven to be a powerful way for senior management to quickly identify potential problems and take corrective action. 

I’ll leave you with this thought. Why focus only on the current year when you can cross over many years, using a rolling forecast that uses the most up-to-date and relevant data? Instead, drive toward achieving the best, timeliest decisions with a flexible forecast that can become part of the company culture and improve business results.