What Is a Rolling Forecast? Pros, Cons, and Best Practices

Be prepared to explain – over and over – how the new process works and why it makes more sense for your business. This post was originally published in September 2021 and has been updated for comprehensiveness. This content is presented “as is,” and is not intended to provide tax, legal or financial advice.

1. It’s also a morale killer if it’s done as targets come closer to being reached.
2. Organizations are structured around the budgeting, forecasting, planning and reporting cycles that currently exist.
3. Any fluctuations to operational activities can be accounted for throughout the year, instead of just once.
4. Rolling forecasts forward on a monthly or quarterly basis allows finance teams to map out scenarios in a more strategic way.
5. They strive to improve every quarter — prioritizing the time to think strategically and critically about issues and not allowing themselves to be solely driven by a specific deadline.

At Talentia, we help companies avoid difficulties, errors and labor-intensive work by automating and simplifying the forecasting process. Most importantly, they should focus on how doing each of these things will increase participants’ potential reward. Forecast accuracy decreases when performance rewards are tied to the outcomes. Setting targets based on a forecast will lead to greater forecast variance and less useful information. An organization should have a periodic planning process in which targets are set for managers to achieve.

How to Create a Rolling Forecast

Rolling forecasts provide greater visibility into an extended time horizon. If it’s accurate, it can help an organization prepare properly for “what’s around the corner” and mobilize more effectively. The key to implementing a rolling forecast model is having the right technology. Manual processes are error-prone, time-consuming, and can be very inefficient.

Resources

In other words, live rolling forecasts take static budgets one step further. They enable you to make informed decisions with actionable insights instead of relying on mere, already outdated numbers. In contrast, you continually update rolling budgets throughout the year to reflect the business’s actual performance. Since https://business-accounting.net/ they’re not set in stone, rolling budgets can give a company more flexibility by providing regular opportunities to adjust based on real performance. AgilityRolling forecasts allow you to adjust the forecast to accommodate recent changes or trends, meaning you’re able to respond better to time-sensitive decisions.

With the high-paced work environment many employees navigate today, a rolling forecast will help departments improve communication. It will primarily help your finance department obtain accurate and timely data on cash flows, consolidation and close and budget forecasting. A rolling forecast process will require shorter, more frequent blocks of time focused throughout the year. Communicating changes and managing expectations is critical to a rolling forecast success. Perform an assessment of the current forecast process that identifies where major data hand-offs are as well as when and to who forecast assumptions are made.

Traditional forecasting relies on previous data to project future business metrics such as inventory needs, budgets, revenue, and asset performance. Traditional forecasting methods are ineffective because the past does not always predict the future. When relating asset operations to performance metrics and expenses, traditional forecasting isn’t excellent. It relies primarily on previous data, which might lead to a discrepancy between forecasts and actuals. It also necessitates organizations’ assumptions being simplified or oversimplified.

Live rolling forecasting gives you the capability to analyze data in real-time and take immediate action based on results. Which allows you to react quickly to market conditions and adjust your plans accordingly. The biggest difference between rolling forecasts and the traditional budgeting process is that annual budgets determine the plan for the entire upcoming fiscal year. Coming up with an annual budget is a long process that takes a lot of research and ties up resources — then the rest of the year becomes a countdown to the next budget.

Annual Budgets Versus Rolling Forecasting

CEOs in Europe have long shared Mr. Welch’s distaste for traditional budgeting. That’s why the rolling forecast and other budgeting methods of continuous planning have replaced the traditional method at many European companies. Now that trend is slowly making its way across the pond, as more and more American-based companies realize that an adaptive planning approach is the best way to set their future course.

As new data comes in, not only do firms need to perform a budget to actuals variance analysis, but they also need to re-forecast future periods. This is a tall order for Excel, which can quickly become unwieldy, error prone, and less transparent. Without a lot of initial labor and setup, the rolling forecast process can be fraught with inefficiencies, miscommunication rolling forecast vs traditional budget and manual touch points. So far, the early 2020s have shined a massive spotlight on at least one trend in finance—the need to adopt a rolling forecast for planning and flexible budgeting. When Scripps’ daily charges report showed a 35%-37% drop in volume, finance leaders began analyzing the revenue impact over a two-week period and projecting volumes quarterly.

Most organizations can forecast with a relative degree of certainty over a 1- to 3-month time period, but beyond 3-months the fog of business significantly increases and forecast accuracy begins to wane. The rolling forecast strives to address some of the shortcomings of the traditional budget. Specifically, the rolling forecast involves a re-calibration of forecasts and resource allocation every month or quarter based on what’s actually happening in the business.

You should regularly check it and measure your actuals against what you forecasted. For instance, if last year was exceptionally good, a churn rate of 5% might be considered bad for you. But this year, if business conditions change and 5% becomes your average churn rate, the downside scenario you created at the beginning of the year is obsolete. However, what was considered underperforming or overperforming last year might not be the same this year. Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.

Benefits of Using a Rolling Forecast

Historically financial modeling has been hard, complicated, and inaccurate. The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward. On the flip side, a rolling forecast takes into account recent revenue, churn, expenses, and other metrics.

Whether you’re a seasoned pro looking to refresh your skills or a newbie trying to make sense of it all, this guide will help you understand and effectively use rolling forecasts in your business. But building and constantly updating a rolling forecast comes with its challenges if the organization lacks the proper automation and discipline to facilitate it. The rolling forecast model is arguably most popular in difficult economic times.