Rolling Forecasting for FP&A Teams: A Definitive Guide

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 financial forecasts have three important traits:

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.

How Rolling Forecasts help FP&A Teams?

Rolling forecasts can help FP&A teams by providing them with a more accurate view of future performance. By using past data to create projections for the coming period, rolling forecasts can help identify trend patterns and possible issues that may impact future results. This allows FP&A teams to plan accordingly and make necessary adjustments to ensure that they meet their goals.

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 financial 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 1^st or 2^nd 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.

Rolling Forecast vs Normal Forecast

A rolling forecast is a forecast that is constantly updated as new data becomes available. This means that the forecast changes to reflect the most recent data, rather than using a single point in time to make a prediction.

A normal forecast, on the other hand, is a forecast that is not updated as new data becomes available. It uses a single point in time to make a prediction, which may be inaccurate if new data becomes available after the forecast has been created.

Four Key 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 Forecast 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 rolling forecast best practices to help organizations implement its 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 forecast power BI 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 financial 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 financial 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 30^th 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 financial 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 1^st 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.

Key Takeaways

1. Unlike traditional budgets, rolling forecasts continuously evolve to provide accurate predictions, making them essential for agile planning and budgeting.

2. Rolling forecasts follow a series of steps, are reevaluated over multiple instances, and can be adjusted based on changing circumstances.

3. Rolling forecasts help identify trends, possible issues, and risk factors, allowing FP&A teams to make necessary adjustments to achieve their goals.

4. Rolling forecasts offer flexibility and allow for monthly or quarterly reviews enabling departments to see variances, analyze causes, and adjust plans promptly, improving agility and adaptability.

5.  Key benefits of rolling forecasts are:

• Improved Risk Analysis: Rolling forecasts help businesses analyze changing conditions and prepare for potential risks.
• Higher Forecast Accuracy: They allow organizations to factor in internal and external variables, enhancing forecast accuracy.
• Continuous Cash Flow Monitoring: Regular reviews help optimize cash flow management.
• Tracking Operational and Financial Performance: Rolling forecasts enable monitoring and adjustment of critical performance drivers.

6. Acterys is an integrated xP&A platform that simplifies the rolling forecasting process using Power BI. It automates data integration, supports centralized data models, schedules updates, and provides ready-made templates and visuals for comprehensive planning.

FAQs

1. What is a rolling forecast?

A rolling forecast is a financial management approach that continuously plans, forecasts, and re-forecasts for a predefined period, offering flexibility and reactivity. Rolling forecasts adapt to changing conditions, consumer trends, industry shifts, and regulations. 

2. How do rolling forecasts benefit FP&A teams?

Rolling forecasts benefit FP&A teams by providing a more accurate view of future performance, identifying trends and potential issues, and enabling proactive planning and resource allocation.

3. How do rolling forecasts compare to normal forecasts?

Rolling forecasts are constantly updated with new data, providing a more accurate view of the future compared to normal forecasts, which rely on a single point in time and may become outdated.

4. What are the best practices for implementing rolling forecasts in organizations?

Best practices include implementing a phased approach for adoption, specifying the time horizon and rollover period, determining objectives and value drivers, and performing comparative analyses among different forecast periods.

5. What are the benefits of implementing rolling forecasts?

Organizations can expect improved risk analysis, higher forecast accuracy, continuous cash flow monitoring, and the ability to track operational and financial performance more effectively by implementing rolling forecasts.

Key Takeaways

1. The primary purpose of any forecast is to provide a snapshot of the future for business planning and budgeting. Flexibility and adaptability are crucial, as forecasts should evolve with changing conditions.
2. Rolling forecasts involve continuously planning, forecasting, and re-forecasting for a predefined period (e.g., 6 or 12 months). 
3. Rolling forecasts empower decision-makers to make short-term decisions, predict scenarios accurately, and allocate resources effectively.
4. Rolling forecasts offer several advantages over traditional budgeting, including greater accuracy, the ability to monitor cash flow, improved risk analysis, and continuous tracking of operational and financial performance.
5. Rolling forecasts allow organizations to adapt to changing circumstances, perform impact analyses, and curate plans and budgets based on likely scenarios.
6. To successfully implement rolling forecasts, organizations should consider using modern financial planning tools (e.g., Power BI), specify the time horizon and objectives, perform regular variance analysis, and adopt a phased approach to change management. 

FAQs

1. What is a rolling forecast?

A rolling forecast is a financial management approach that allows businesses to continuously plan, forecast, and reforecast for a predefined period, such as the next 6 or 12 months. It empowers decision-makers to make short-term decisions, predict future scenarios accurately, and allocate resources effectively.

2. How do rolling forecasts differ from traditional budgeting?

Rolling forecasts differ from traditional budgeting in that they are constantly updated to reflect changing conditions and provide a more accurate picture of future performance. Traditional budgets are static and often become outdated over time.

3. Why do organizations need rolling forecasts?

Organizations need rolling forecasts because they provide a constantly updated view of a business’s future performance. This helps organizations adapt to changes in consumer trends, industry dynamics, and regulations. Rolling forecasts also facilitate driver-based planning, allowing forecasts to be based on key metrics rather than relying solely on past results.

4. How can rolling forecasts benefit FP&A teams?

Rolling forecasts benefit FP&A (Financial Planning and Analysis) teams by offering a more accurate view of future performance. By using historical data to create projections for the coming period, FP&A teams can identify trends and potential issues, enabling them to plan and make necessary adjustments to meet their goals.

5. What are some best practices for implementing rolling forecasts in an organization?

Implementing rolling forecasts effectively involves specifying the forecast time horizon, determining objectives and value drivers, performing regular variance analysis, and adopting a phased approach to change management. Using modern financial planning tools like Power BI can also streamline the process and improve efficiency.