While the annual budgeting process is an important step in setting goals and defining resource allocations for the coming year, the pace of change in today’s business world typically makes the annual budget obsolete after a few months.
In response to this, a growing number of organizations are adopting the rolling forecast technique to transform planning and better cope with the unpredictable nature of the business world.
Rolling forecasts is a flexible planning technique that enables organizations to adjust their spending plans and resource allocations based on changes happening in the economy, industry, or enterprise. Read on to learn how rolling forecasts can help your firm stay agile and thrive in an uncertain environment.
Your Budget May Already Be Out of Date
That budget you spent so long working on towards the end of 2016 might be completely meaningless by the end of Q1 2017. You might not have taken into account the impacts the Trump presidency would have on the economy, or the volatility of global commodity markets, or the Fed’s plan to increase interest rates.
What’s the difference between traditional budgeting and rolling forecasts? A traditional budget is typically built over the course of months, includes a great level of detail, and helps the organization set its initial financial targets and resource allocations for the upcoming fiscal year. Actual financial and operating results are measured against the budget, and it’s not typically revised throughout the upcoming year (which is why this method is also known as “static” budgeting).
Variances between actual results and the original budget, and its underlying assumptions are explained on a monthly and quarterly basis. And as the year unfolds, these variance explanations identify specifics about where and why actual business conditions and results differ from the original budget assumptions.
Rolling forecasts, on the other hand, provide an opportunity for organizations to project future financial results based on a combination of actual financial results, and the original budget, or updated revenue and expense forecasts. For instance, at the end of the first quarter, the projected results for the fiscal year can be created by combining the January – March actual financial results, with the budgeted revenue and expenses for the remaining quarters. If business conditions have changed so much that the budget for the remainder of the fiscal year is no longer valid, Finance can collect updated revenue and expense projections for the remaining periods from line managers. These projections are combined with the first quarter actual results to create a more accurate projection of results for the fiscal year.
A more advanced approach that many organizations are adopting is using an add/drop model over a set period of time to anticipate future outcomes. Let’s say your rolling forecast covers a period of 4 quarters. After the end of Q1, you add the 1st quarter of the next year into your forecast. Similarly, at the end of Q2, you add the 2nd quarter of the next fiscal year into your forecast. The forecast is based on the most current information that you have, and as each quarter passes, you revise your predictions further into the future. This method provides the organization with a head-start on budgeting for the next fiscal year, since the work is done in advance and takes into consideration the latest results and assumptions about the business going forward.
Are Rolling Forecasts More Work?
On the face of it, it would sound as though rolling forecasts are significantly more work for the finance and accounting department than a static budget – you’re constantly evaluating business performance and updating the forecast. But the reason many organizations are adopting this technique is that it allows them to more intelligently allocate, or re-allocate resources, and it makes the annual budgeting process much easier, when the time comes. In some instances, the annual budget is dropped completely and the organization is run entirely on a rolling forecast process,
Rolling forecasts represent a commitment of time and resources, though they don’t have to sap the strength of your finance and accounting department. Organizations that use a cloud-based planning and forecasting solution, find the process becomes significantly easier and faster than collecting data manually, using spreadsheets and email.
What makes cloud-based planning platform superior for managing rolling forecasts? Here’s a list of its advantages:
- A centralized database is used to collect budget and forecasts data so they can be rapidly consolidated
- Browser-based planning templates are used for speed and ease of use as opposed to spreadsheets
- User-friendly interfaces make the system intuitive for Finance and line of business users
- No more data silos – the cloud-based planning system connects to data sources and automatically captures the latest financial and operating results managers need to update their forecasts
Roll With Market Changes and Gain Agility
When external business conditions suddenly change (such as a jump in oil prices or interest rates), managers need to be able to quickly update their forecasts and analyze the impact of these changes on their projected business results. With the planning and forecasting capabilities provided by modern, cloud-based enterprise performance management (EPM) platforms, organizations can stay agile in the face of new business opportunities or unexpected downturns.
To learn more about how cloud-based EPM platforms can help your organization transform planning and gain agility, watch our on-demand webinar: “Rolling Forecasts – How You Can Make Better Use of Excel.”