Definition: Rolling Forecasts

Rolling forecasts are planning tools that utilise historical data to predict future performance and continuously update over predetermined time horizons. In contrast to static budgets, which only show a forecast over a fixed time period e.g. April to March, a rolling forecast is able to continuously look ahead using an add/drop approach, e.g. dropping a quarter when complete and adding a quarter onto the forecast automatically.

To better demonstrate the difference between a rolling forecast and a traditional static one, the graphic above simplifies the two approaches. As you can see, a rolling forecast will always present an updated view of what your next twelve months will look like at any point in the fiscal year. Whereas, a static annual forecast can only reflect the twelve months ahead from the point it was originally created. Because of this limitation, organisations still using static forecasts experience a ‘fiscal year cliff,’ meaning they have a smaller and smaller view of data ahead of them as the year progresses. In comparison, a rolling forecast’s continuous view of projections allows organisations to be aware of potential shifts in revenue at all times, giving them room to course-correct as market conditions change.

Rolling forecasts, an alternative to the traditional annual budgeting approach?

What is the Traditional Budgeting Approach?

Organisations frequently face challenges in tracking and managing their corporate performance. One of the methods they use to help mitigate that is through a budgeting and planning process. This process typically involves creating a standard of performance that areas such as operations, sales, production, etc are measured. The standard sequence is:

• 1. Map out a forecast using relevant performance targets (profit, revenue, expenses, etc.).
• 2. Compare actual performance versus performance targets - also known as budget to actual variance analysis.
• 3. Analyse the details then course correct.

Downfalls of traditional budgeting

The traditional budgeting approach is used by organisations because it works. It provides a reliable indicator of performance and insights into performance. However, as modern business evolves and is deluged with customer data, traditional budgeting methodology quickly loses its effectiveness and reliability.

This loss of reliability and effectiveness is partially tied to the increasing volatility of markets. As business is globalising and financial capital is internationalised, organisations must manage a greater influx of considerations and information to compete. Simply having an annual static plan will no longer be viable to react in a rapidly changing environment.

Furthermore, the traditional budgeting approach lacks a link to build an effective strategy. The traditional process focuses on reducing costs as opposed to creating business value, meaning that strategic initiatives will inherently be made a lower priority to actions that cut costs. Often this will lead to a budget that is disconnected from business drivers, which may be seen as defeating the purpose.

The case for rolling forecasts

Now, on to rolling forecasts. The case for rolling forecasts is quite simple really, they cover all the things a static annual forecast can, and more.

Some key advantages of adopting a rolling forecast approach are as follows:

1. You can adapt quickly to any new scenario: With rolling forecasts, you’ll have the latest updated financial and market data reflected on your forecasts at every set update. This provides you with a perpetual view of the next twelve months ahead based on the realities of your business performance. This leads to allowing your organisation to quickly identify and respond to any changes, opportunities and threats, all while staying ahead of your competitors.
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3. Risk Mitigation: With a continuous projection of the next twelve months, you are able to easily project your use of financial resources, and your remaining capacity. You are simultaneously able to conduct scenario planning and a What-if Analysis to identify the scenarios that optimise your resource allocation, and measure out the levels of risk exposure with each decision.
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5. Relevancy: A rolling forecast approach is driver-based, meaning that it is centred on the business drivers that can affect current and future performance, instead of historical data. By keeping track of the most up-to-date information around drivers such as category growth and human capital, organisations are able to drastically cut down costs and time, and efficiently allocate resources to fuel performance in areas that could use strengthening. This inherently steers your budget to be consistent with your business objectives and KPIs.

6. Do we abandon the annual budget for rolling forecasts entirely?

   Well before we make that decision, there are a few aspects to think about. Rolling forecasts do have the capacity to replace annual forecasts, but the reality is, they likely will end up being used to supplement an organisation's existing enterprise performance tools. A core reason for this is that the historic business standard is that plans are prepared on a fiscal year basis. What this means is organisations likely will hold focus on annual financial statements. This does not at all stop a rolling forecast approach, in fact, rolling forecasts can still slot in here. But the reality is, these are the entrenched processes organisations have grown accustomed to.

   Furthermore, if we add on a rolling forecast approach, this creates additional work, which may mean scope and human resource capacity needs to be re-evaluated and monitored. Because of this caveat, it is important to centre the highest priority KPI’s and only the most important details to avoid an overload of work. Ideally, this should result in less detail than a more granular year-end forecast. The rolling forecast intervals for reforecasting and time-horizons should be set strategically in order to minimise additional work, and keep forecasts at peak accuracy.

   When is the ideal time to incorporate rolling forecasts?

   Well, simply put, as soon as possible. Market volatility is showing no signs of easing. Traditionally volatile sectors are becoming more so, and even ‘stable’ sectors are becoming increasingly unpredictable. This means organisations need to reinforce their planning, and their ability to adapt to uncertainty. Rolling forecasts are a critical tool to helping your organisation navigate this volatility and centre your operations with focus and clarity.

   A useful frame of mind to consider for setting rolling forecasts is that: the higher the levels of market volatility in an area, the shorter the time intervals should be for review and adjustment of the rolling forecasts. Opposingly, the less market volatility, the longer the intervals can be set.

   If you see that your actual data and your forecasted data regularly do not match each other, or are wildly different, implementing a rolling forecast approach would be an insightful action to understand and manage these deviations.

   Action swift plans with Rolling Forecasts

   What are the steps to implementing a rolling forecast in your organisation?

   Okay, let’s assume you want to incorporate a rolling forecast approach into your organisation, but there may be some resistance in your team or wider departments about embracing it. So let's look at a few key steps that can help your organisation warm up to the idea:

   1. Create a time horizon that makes sense with the realities of your operations. A highly seasonal industry such as event management, or tourism may consider using an 18-month rolling forecast. Industries that orbit around major capital investments such as building and infrastructure may prefer longer-term rolling forecasts in the range of 24 months or longer. Figure out the scope of detail you need before the point of diminishing returns. For many organisations, it is useful to examine quarters in granular detail, but the accuracy and scope of details diminish the further out you forecast in the future. This is because the factors to consider in the future grow exponentially, and this makes prediction far more difficult and time-consuming to model.
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   3. Determine all the data sources that your organisation utilised and drew insights from within the last few years. What sources offered the most effective insight, which were the most useful indicators, and which sources drove your plannings and strategic decisions? This will allow you to identify the key streams of data that should be forecasted using history and drivers. Once identified you can manually auto-populate these categories onto your rolling forecasts, and any manual population of categories can be done by exception.
   4. Give preparation time to your organisation. It’s a difficult feat to shift a long-ingrained ideology, or operational style, especially when it still fulfils the intended purpose. It takes time for people to break out of habits, even if you present a new idea that could instantly solve all of someone's operational issues, people will likely still gravitate towards their old routine, just because it feels natural. It takes time for people to change their habits and make room for new solutions. So, you really do need to put in the time and effort to cultivate a ‘rolling forecast state of mind’. Whether that comes in the forms of one-on-one conversations, FAQs, or opportunities for open discussions, it is the accumulation of small wins that will help you win the war of persuasion. In addition, the more people you involve in the process, the more favourable they will likely be to adopt the switch.
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   6. Utilise your rolling forecasts to identify any outliers or anomalies to your plans sooner rather than later. The key benefit of rolling forecasts are their flexibility- the ability to scenario test, analyse and determine opportunities to course-correct ahead of time, is an invaluable tool to show the actual benefits of rolling forecasts to your teams.

   7. Select the right software to make sure your rolling forecasts land

      As previously stated, rolling forecasts often do not replace the traditional annual forecasting approach that is already in place within many organisations. Instead, they usually function as a supplementary tool, which means for finance teams still using Excel as their primary financial modelling software, unfortunately, more work. In order to implement an effective and continuous performance management approach with rolling forecasts, implementing a specialised solution is the recommended route. Now, having timely and real-time forecasts is wonderful, but if you cannot act quickly to get those results, your work will likely get wasted. Automation and unification of processes allows time for analysis and strategic recommendations, but these must all be reinforced by an agile approach of action to be effective.

      Rolling forecasts fully incorporate the digital transformation efforts that organisations have made in the last decade. Modern, real-time digital platforms allow for seamless collaboration and planning between teams under the same assumptions, even across different time zones and scattered geographies. Any changes to budget figures done by one party will be immediately reflected onto everyone’s screen as it is made.

      Finally, the right software will allow you to align your data, processes and people to operate as an organisation’s single source and version of truth. Spreadsheet technology, simply, is not made to handle rolling forecasts. MODLR offers powerful modelling and calculating capabilities that not only functions beyond spreadsheets’ abilities but also above other cloud-based platform providers. MODLR’s software enables organisations to seamlessly implement rolling forecasts into their operations, providing them with the agility to ever-changing business environments that other inflexible ERP and financial suites can not.