Many entrepreneurs, particularly in quickly-changing periods like we’re in now, create rolling forecasts rather than static long-range forecasts. Rolling forecasts can provide you with a much more dynamic approach that’s suitable for budgeting and re-budgeting future expenses and revenue at regular intervals. It is a result of processing large amounts of data considering external changes within the industry and variations in the overall economy.
A rolling forecast can predict the future performance of a business over a continuous period, based on past performance — which is routinely updated to reflect any changes in market or business conditions. Check out the following pros and cons of rolling forecasts and how to create them for a successful process.
Pros of Rolling Forecasts
Feeding a vast amount of financial and market data into the system makes rolling forecasts a multi-purpose tool that enables your organization to leverage the following benefits.
Increased Control Over Finances
Rolling forecasts can provide businesses with continuous access to long-term data to make informed business decisions and to better allocate resources. Thus, you can fine-tune your financial plan and the overall strategy of your business. Forecasting can help you better understand the factors that drive results and identify and respond quickly to changes in them.
Save Considerable Time
Rolling forecasts can reduce the time required to create the annual budget. Companies that combine rolling forecasts with a detailed yearly budget have high-level forecasts available for the next financial year. Rolling forecasts are updated regularly, so they enable leaders to adjust their business plans to accommodate any recent changes, trends, threats and opportunities by streamlining their processes.
Improve Predictability and Adaptability
Forecasts enable entrepreneurs to have better responsiveness and flexibility. Rolling forecasts can quantify the effects of changes in prices, markets and drivers, and communicate the results to managers. They are beneficial for businesses that want to alter their budgets to adapt to new trends, changes in the industry and consumer demands.
Improve Accuracy of Forecasts
Rolling forecasts can give you regular insights regarding the external market, aligning it with the strategic goals and objectives of the organization. They can also provide a platform for managing investor and banker expectations for more accurate and versatile forecasting. You should update the forecast on an ongoing basis, even amid fluctuations in the industry, economy or marketplace.
Tracking Financial and Operational Performance
Rolling forecasts focus on the factors that could affect the current and future performance of a business, such as sales, market share and human capital. Thus, you can keep track of the critical drivers for the performance, customer buying trends and much more. The forecast can help organizations efficiently allocate resources to create a budget that is consistent with business objectives.
Rolling forecasts enable you to reduce risk and allocate resources more optimally to meet your financial objectives. Projecting future use of resources and analyzing what-if scenarios can help decision-makers proactively measure and minimize risk exposure. With rolling forecasts, you can respond to industry, economic and business changes in a timely manner.
Help in Strategic Decision-Making
Updated forecasts provide leaders with insights affecting revenue and expenses. This enables decision-makers to determine the impact of any decision on their bottom line. Forecasts are regularly updated at specific intervals to ensure that they are based on the most relevant and recent information. Risks and opportunities identified during a rolling forecast can help you analyze “what-if” scenarios, providing a more accurate picture of the current position and future outlook.
Monitoring Cash Flow
Rolling forecasts allow entrepreneurs to monitor their cash flow, regardless of their business size or type. Gathering valuable insights into cash inflow and outflow through forecasts can facilitate an increased analytical approach to cash management.
Now, Check the Cons
There are some aspects of the rolling forecast model that may make it less appealing for some companies, as follows:
Time- and Resource-Consuming Process
Rolling forecasts demand a mass-scale investment of time and resources. Therefore, many organizations still refrain from adopting this practice.
Harder to Implement
Since rolling forecasts change continuously based on real-time feedback and data, many organizations find them more challenging to implement than a static budget.
Complex to Track and Manage
As the business grows and data gets more intricate, maintaining a rolling forecast becomes more complicated. Over time it also becomes harder to track changes in drivers if the forecasting process isn’t automated.
Limits Comparative Analysis
Even if you get a more precise rolling forecast, it can be problematic to perform comparisons of the performance against previous years, which limits the analysis.
How to Create a Rolling Forecast
The goal of creating a rolling forecast is to make it easier for the management team to understand trends and opportunities as they arise and have a plan in place. When you start the process of creating a rolling forecast model, there are seven steps to follow.
Step 1: Identify the Objectives and Key Drivers
Define the goals of the forecast model, who will use it, and for what purpose before building the projections. Setting the objectives also involves identifying the people who will rely on the forecasts to make decisions.
Next, identify the high-value drivers with the most significant impact on the performance of the business, such as orders or sales and working capital. If your business is prone to external factors, such as exchange rates, political changes, market changes, etc., you should also take their financial effect into account for your forecasting. Focus on large or variable spend drivers that can impact a specific forecast period to improve analysis and decision-making.
Step 2: Choose the Right Forecasting Horizon
The forecasting time horizon can be 12, 18, 24 or any number of months or quarters from today. The defined period depends on business needs, preferences and capabilities, industry type, and how long it takes to make decisions. A business must keep the time frame of rolling forecasts in mind during the planning, and decide how far into the future the leaders want to look.
The more dynamic and market-dependent your company is, the more frequent and short your time horizon should be to respond effectively to changes. A rolling forecast considers monthly changes that are essential for risk assessment. Thus, you can keep track of important drivers that are critical to the success of any organization.
Step 3: Determine the Level of Detail and Verify the Data Source
The length of the rolling forecast period can help you determine the level of detail to include in the forecast. If outcomes of a wrong decision are potentially very significant, the creator of the forecasts should spend more time and effort checking the accuracy of the data.
Ensure that your data is reliable, accurate and credible to provide the desired results before putting it into the forecast model. Management must also verify that data sources are high quality and trustworthy, and evaluate data based on the high-value drivers.
Step 4: Identify the Contributors to the Process
Figure out the participants who can contribute relevant, unbiased and insightful intelligence, along with the time they need to allocate to the process. Next, each business unit should set a monthly or quarterly target and report actual performance against this target.
As you update your forecast with the latest monthly data, the data from the earliest month gets dropped, providing you with a continuously changing forecast of your business. Thus, the forecast horizon continues to roll forward, based on the most current data available.
Step 5: Establish Scenarios and Sensitivity Analysis
At this stage, evaluate all the possible scenarios that you may have to adapt to, depending on the drivers of your company's growth. As new challenges come or trends appear, update the forecast to find new possible outcomes. Having prior knowledge of possible or likely scenarios can help leaders make better decisions.
Step 6: Deploy Appropriate Tools and Technologies
Rolling forecasting requires a platform that is flexible and can easily and quickly adapt to changing conditions of the drivers, as well as external market and competitive conditions. Such platforms can provide already built-in analytical tools and algorithms to identify patterns, pull in data from outside sources and deploy internal financial and operational systems. Thus, they can improve the accuracy of your forecast and minimize the effect on the overall plan. Deploying the appropriate technologies and processes can support your high-value initiatives.
Step 7: Measure Actual and Estimated Forecasts
Once you implement the rolling forecast, compare the actual results and the set targets to find the effectiveness and accuracy of the planning process. If there are any variances, the participants in the process should identify the sources of the potential differences and figure out the appropriate actions to take to mitigate such issues for future forecasts.