Rolling Forecasts - challenges, best practice & technology (part 3)

Welcome to the last in the 3-part Analyste series examining the Rolling Forecast and how, supported by the arrival of cloud technologies and a new generation of finance philosophy, it continues to challenge the traditional budget for finance supremacy in today’s increasingly agile and competitive global economy.

You may want to check out our previous: Rolling Forecasts: is it time to abandon the traditional budget? (Part 1) and Rolling Forecasts: benefits, key principles & scenario modelling (Part 2) as we move onto the final leg of our journey, exploring why organisations need a forecast in the first place, some of the challenges you can expect when considering a move to a rolling forecast model, best practice and technology advice.

Why organizations need a budget in the first place

Let’s first examine rolling forecast best practice for mid-sized and larger organizations. Knowledge of all aspects of the business, including income streams and expenses, is critical to facilitating full visibility around future investment opportunity and crisis management planning.

As a business grows and expands, so does the need for a safe and reliable method to manage its finances, today and in the months and years ahead. In parallel, the process of collating and analysing data also increases as does the need for a complete and real time view of the business as a whole. As a result of this need for visibility, most organisations operate a budgeting and planning process from which a standard of performance can be managed across all areas of the business.

Traditionally, and in the simplest of terms, the budgeting and planning process looks something like this: decide a static forecast (budget) tied to specific performance (target) e.g. sales revenues, business expenses etc then simply track actual performance against the pre-agreed targets, analyse and correct via re-forecast as you move through the financial year.

Unfortunately, the traditional budget can sometimes fall short across a number of areas:

• The traditional budget does not react to what is actually happening in the business during the forecast (budget) period
• The traditional budget creates a number of counter-productive incentives at the business-unit level which can encourage ‘sandbagging’ (hiding or pushing deals out in order to meet anticipated targets)
• The traditional budget works within specific timelines, thus on occasion, encouraging budget misuse in order to warrant and/or facilitate next year allocations

Rolling forecast to the rescue

The rolling forecast addresses some of the above shortcomings as it requires a re-calibration of the forecast on a monthly or quarterly basis which considers what’s actually happening in the business, rather than what was estimated some months prior.

Real-time decision making allows businesses to direct resources efficiently and provides business leaders with a full twelve-month vision at any given point in the year.

In addition, flexibility exists in determining the rolling forecast period and horizon which can be determined according to business exposure levels to market flux and influence. A good rule of thumb suggests, the more market dependant your business, the more frequent and shorter your rolling forecast time horizon needs to be in order to adapt quickly to change.

Challenges of the rolling forecast

For all its obvious benefits, various industry surveys estimate approximately 40% of companies currently use a rolling forecast model. Whilst only a few companies have decided to completely replace the static annual budget in favour of the continuous rolling forecast, a large portion of those adopting a rolling forecast utilise it alongside, not in place of, the traditional static budget.

The traditional static budget is also still considered sufficient, by many organizations, to provide a useful guide working in parallel to long-term strategic planning.

Implementation of a rolling forecast model can also prove challenging as it requires frequent real-time data input from across the business, further hindered by an over reliance on error prone spreadsheets and manual, labour intensive processes.

Preparing for a cultural shift

Most organisations are structured to fit around traditional budgeting methods & processes - trying to change how people work and perceive the value of a new process can be a hard habit to break. Implementing a new forecasting methodology is no exception – here’s some quick tips around key areas of focus to consider when planning a move to the rolling forecast model:

• Communication is King - assess the current forecast process, identify when, how and who will be responsible for providing data. Map out the new rolling forecast process structure and communicate to key players. The project success ultimately depends on full and ongoing collaboration from entities and business units – reinforce this message through regular communication and encourage a culture of accountability and open dialogue amongst the group concerned

• Get Senior management buy in - senior business leaders must be committed to the change in forecasting approach and champion the rolling forecast model as a better way to increase the organization’s agility and adaptability

• Track actual performance to the rolling forecast: monitor actual forecast. Seek to understand what occurred, why it occurred, and what should be done to address the variance. This applies to performance failures and successes, preparing for future opportunities and will position you company to make better decisions

• Automate like your forecast depends on it - increase forecasting process automation and invest in cloud-based technologies to demonstrate your organisations commitment to the new process. Reduce reliance on error prone spreadsheeting and support remote working to improve accuracy and reliability

Traditional static budgets still play a key role in ‘painting a financial picture’ from a strategic plan, but they are generally inflexible and reactive and can foster unwelcome levels of operational despondency.

Rolling forecasts on the other hand are pliable and dynamic by nature. Whilst they may not be replacements for an annual static budget, they work very well in parallel.

As businesses grow, forecasting can become increasingly difficult to manage due to the volume of internal stakeholder relationships involved in the process and the data accuracy required to execute the forecast efficiently and effectively.

Having the right tools in place can also prove a significant advantage with organisations who have invested in cloud & remote working technologies proving better equipped to deal with unforeseen challenges such as the unprecedented COVID-19 crisis. Specialist cloud-based systems are fast replacing spreadsheets as the forecasting tool of choice, allowing businesses access data from anywhere, quickly, efficiently and accurately.

You may want to check out our previous: Rolling Forecasts: is it time to abandon the traditional budget? (Part 1) and Rolling Forecasts: benefits, key principles & scenario modelling (Part 2)

Author: Anne-Marie Rice (Market Strategist at Analyste)

Contact: email: anne-marie.rice@analyste.com

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