The purpose of any forecast is to provide the closest possible snapshot of the future for business teams to plan and budget their activities. In essence, a good forecast is determined by its flexibility to evolve as per the changing conditions instead of sticking to the same initial projections across the financial period.
As such, rolling forecasts are a solid first step towards agile planning and budgeting for organizations looking to become more reactive and adaptive to change. This approach enables businesses to project their future performance more accurately by adjusting the forecasts based on the fluctuating internal or external conditions as they emerge.
In this blog, we’ll explain:
- What rolling forecasts are
- Why organizations need rolling forecasts
- How rolling forecasts are better than traditional budgeting
- The benefits of using rolling forecasts for FP&A teams
- The best practices for implementing rolling forecasts in your organization
- How a unified xP&A platform can help simplify and streamline the rolling forecasting process
What is a Rolling Forecast?
Rolling forecast is a financial management approach that enables businesses to continuously plan, forecast, and reforecast for a predefined period, e.g., for the next 6 or 12 months. It empowers decision makers and finance pros to take effective short-term decisions, predict future business scenarios more accurately, and re-allocate resources to ensure the business delivers the forecasted results.
The starting point for rolling forecasts is a baseline forecast for the upcoming fiscal period based on the historical data related to critical KPIs. Once done, it is used to create projections for the next 9, 12, or months ahead so that the business has a consistent snapshot of the future.
Rolling forecasts have three important traits:
|They follow a series of steps to develop and implement||They are reevaluated and perfected over multiple instances of those systematic steps||
They can be adjusted or revised based on the circumstances
The beauty of rolling forecasts is that instead of being a fixed point in time, it is constantly evolving and adds a fresh perspective to the time horizon based on current scenarios.
Why Do Organizations Need a Rolling Forecast in the First Place?
Rolling forecasts are, in essence, a document that is constantly updated to paint the most accurate portrait of your business’s future performance. It considers the current consumer trends, changes in the industry, and new regulations and helps continuously post updated forecasts that prepare your organization for potential turns and twists. In addition, this approach facilitates driver-based planning where you can base your forecasts on key metrics, like human capital, sales, market share, production rates, and others, instead of past results.
Perhaps the biggest incentive of using rolling forecasts is the sense of accountability it provides to stakeholders. It helps answer the critical questions, such as whether you underperformed, exceeded expected results or achieved the set targets. Once you evaluate the numbers, you can find the reason behind the outcomes, determine whether to stop, scale or repeat the actions, and tweak your plans and budgets accordingly.
In other words, rolling forecasts allow you to understand the “why” behind the numbers and helps turn insights into real-world actions.
From Rigidity to Flexibility: Traditional Budgeting vs Rolling Forecast
For decades, annual budgets have been the way for organizations to plan the preliminary financial and operational targets and allocate resources to various departments accordingly. That’s primarily because teams from across the organization dedicate resources and spend months preparing a highly detailed document that measures actual vs forecasted results of the current year and use them as a reference to prepare plans, budgets, and projections for the upcoming fiscal year.
But the problem with an annual budget is its static nature because it is not updated for the whole 12 months. And in today’s hyper-competitive and constantly fluctuating business landscape, a lot can happen in this amount of time. In addition, the entire process is very labour-intensive and time-consuming and can take up to 2-4 months to complete. In that duration, the data used to prepare the annual budget will likely become stale by the time it reaches final review and is stamped “okay” for implementation.
To understand the value rolling forecasts add to the financial planning process, you need to look at the core objectives you want to achieve. Ideally, a business uses forecasting techniques to:
- Get an accurate picture of the business’s performance in the upcoming quarters or years so that the right decisions can be made
- Perform an impact analysis of those decisions before they are made
- Curate alternate plans and budgets based on possible scenarios that are likely to occur under certain predicted conditions
This high level of flexibility and reactivity is what makes rolling forecasts a better approach than a static budget. You no longer have to wait till the year’s end to see what went wrong in the 1st or 2nd quarter and then make a point not to repeat those mistakes. Instead, with monthly or quarterly reviews, department leaders are able to see variances and deduce possible explanations for differences from the original predictions. Then use those analyses as baseline to make adjustments in the plans for the upcoming quarters or months.
Benefits of Rolling Forecasts
Improved Risk Analysis
Due to the high market volatility, the influence of economic & political situations, and new government policies, there is always a high chance of risk involved that can potentially impact the business performance. With rolling forecasts, you are continually evaluating the changing conditions and using them to update your action plans and budget allocations, allowing you to stay on track to achieve your goals.
Higher Forecast Accuracy
Organizations factor in many internal and external business variables during the forecasting process and predict their impact on future performance. For example, an increase in the electricity tariff or a new government policy that impacts the market you operate in will mandate fine-tuning your planned financials and resource allocations to reflect the imminent changes. To ensure you have accounted for such changes and brace for their impact, rolling forecasts give you the ability to make your plans and budgets more reactive, accurate, and reliable.
Continuously Monitor Cash Flow
Finance pros can regularly review their company’s cash flow performance with every rolling forecast. It helps analyze cash inflow and outflow patterns and dramatically improves overall cash management, allowing the finance people to optimize its flow across the value chain proactively.
Track Operational and Financial Performance
Rolling forecasts enable businesses to continuously monitor and factor in critical performance drivers, such as production rates, sales, human resources, consumer trends, and more. They give you a great reason to revisit the performance numbers and compare your projections to your actuals. You can easily identify any variances and take prompt actions based on what caused the discrepancy and how it will affect future decisions. This allows your FP&A team to align resources and costs and build flexible strategies to achieve business objectives more efficiently.
Rolling Forecasting Best Practices for FP&A Teams
The benefits of implementing rolling forecasts are plenty, but the adoption rate for this approach is still close to 50%, according to EPM Channel and Hackett surveys. Some organizations have completely replaced their annual budgeting practice with rolling forecasts while others are using a hybrid model with both rolling forecasts and the annual budget. That’s mainly because the annual budget acts as a failsafe for organizations that might end up failing to implement a rolling forecast framework due to its complex, dynamic nature.
Nevertheless, we have laid out a few best practices to help organizations implement the rolling forecast approach and reap its benefits.
1. Rolling forecast in Power BI/Letting go of Excel-based Processes
Microsoft Excel, though extremely popular in the finance community, is still a personal productivity tool instead of a financial planning and forecasting solution.
Sure, some small and even mid-sized organizations have their entire financial planning lifecycle built on spreadsheets. However, the amount of manual work that goes into preparing and updating reports along with the high risk of errors and complexity of data manipulation make it an unsuitable solution.
The result? By the time you’re done with completing a baseline forecast, you are likely to be working with outdated data to work on the series of rolling forecasts and analyses.
Unless you opt for an add-in that extends Excel’s capabilities and provides a centralized server with reporting automation capabilities, your best is to go for modern XP&A solutions. They automate the data collection process and bring siloed data from various financial and non-financial sources into a single data model.
From there, it becomes much easier for users to perform scenario and variance analysis, include different business drivers, and understand the impact of modifications in the plan and budget. It also helps create reports and populate dashboards based on multidimensional datasets with ease. These platforms allow comparing actuals with forecasted data and building scenarios without switching between files and applications.
All of this spikes up the productivity of all teams involved in the rolling forecasting process and provides more time to identify, report, and analyze market conditions to factor in the possibility of acquiring new opportunities and revenue streams. Solutions like Acterys unlocks the financial planning capabilities of Power BI, giving users the ability to build, analyze, visualize, and adjust rolling forecasts with ease and speed.
2. Specify the Rolling Forecast Time Horizon
At the beginning, it is essential to work out the timeframe for a rolling forecast and its frequency. The general trend is forecasting for 12 months ahead in time, but in some situations, the rolling forecast time frame is 15, 18 or 24 months. Factors that impact the rolling forecast duration include the nature of the business, industry fluctuations, economic stability, and business growth rate, among others.
12-month rolling forecast time horizon (image credits: Corporate Finance Institute)
Next, you need to determine the rollover period or the frequency of the forecasts. Generally, it is the month-to-month rollover period, e.g., on 30th June 2021, you will add a new forecast for the month of June 2022 at the end. The same rule applies to quarter-to-quarter and week-to-week (rarely used) rollover periods.
You need to ensure that the entire exercise aligns with your business cycle to achieve short and strategic goals.
3. Determine the Objectives and Value Drivers
Before working on the rolling forecast model, it is critical to determine the goals of your projections, who will be using them, and for what purpose. With clearly defined objectives, the process becomes streamlined, allowing your team to spend the time and energy creating forecasts with the right focus.
The next step is to pinpoint all the value drivers (both internal and external) that have the most impact on your business performance. Internal drivers may include labor costs, orders, production rates, commodity prices, web traffic and lead conversion rates, etc. External drivers can be supplier availability, government policies, political changes, currency exchange rates, and many others.
Identifying key value drivers specific to your business allows business leaders and managers to focus on what’s important. Using the right drivers will not only save time and make rolling forecasting a doable task but also facilitate evidence-based modelling, improve analysis, and help develop alternative scenarios more accurately.
4. Perform Comparison Among Different Forecast Periods
It is essential to determine whether your rolling forecasts are hitting the mark or how far off they are for the intended results. And what better way to do it than performing variance analysis to compare actuals vs. forecasts for multiple periods across the time horizon. This involves comparing rolling forecasts for each period instead of the entire fiscal year. Meaning you need to take data from the 1st month to the last month of your rolling forecast period and also factor in the data of each updated period within it.
Performing these comparative analyses will enable your team to quickly make changes to your existing plans and budgets and help in refining your process for the future rolling forecasts.
5. Go With a Phased Approach
In most situations, change brought on abruptly is not well-received and creates chaos on all levels. It is best to start small with few departments and gradually involve more participants to improve your methods while making them more refined and efficient. Doing so will enable you to create a tried and tested method for achieving better results through rolling forecasts and hence demonstrate the value of implementing this new approach to key stakeholders.
Each iteration must involve continuous improvement so that effective SOPs can be developed and changes in the process can be introduced if the need arises. The goal is to learn and improve from what happened and why it happened, and determine what can be done to create more accurate forecasts.
How Acterys Helps Build a Sustainable Rolling Forecasting Process Through Power BI
Rolling forecasts can replace time-intensive annual budgeting tasks with a continuous, integrated planning process that allows for more frequent business performance reviews. Due to this, business leaders and finance professionals are able to adopt a more proactive approach to identifying and resolving trends, problems, and challenges.
However, the preparation process can be time-consuming and costly, if done using error-prone and redundant spreadsheet-based processes. Imagine updating your spreadsheets with the latest data every 2-3 weeks, updating financial predictions, and adding a new forecast at the end while dropping the current one, all done manually. In addition, compiling data from both financial and non-financial sources can become stressful for FP&A professionals, making overall performance evaluation and forecasting a laborious exercise.
Acterys is an integrated xP&A platform that makes the rolling forecasting process simpler and more streamlined using Power BI by:
- Automating all data integration jobs through instant connectivity to financial and non-financial data sources and native Acterys Apps
- Supporting a centralized data model built on an Azure/SQL data warehouse, enabling mapping data points and building the forecasting logic in a star schema
- Scheduling updates of key metrics and creating workflows to deliver real-time data through its built-in components
- Providing with ready-made, fully editable Power BI Desktop Financial Report Templates, as well as Power BI Custom Visuals that enable comprehensive planning features and editing directly on their Power BI report
In essence, Acterys enables accessing real-time data for rolling forecasts while taking the load of preparing and handling data off your finance pros, allowing them to focus on what really matters.
If you want to see how Acterys streamlines the rolling forecasting process, get a free trial today. You can also book a meeting with our solution experts to get a personalized demo for your specific needs.