Rolling Forecast Definition
A rolling forecast is a management tool used for continuous planning and budgeting in businesses. Unlike traditional forecasting, which is typically done annually, a rolling forecast is updated regularly, often monthly or quarterly.
Purpose of Rolling Forecast
A rolling forecast helps businesses with a more dynamic and adaptive approach to planning and budgeting, especially in rapidly changing market conditions. It allows companies to adjust their forecasting based on the latest market conditions, operational results, and other relevant factors. By continuously updating the forecast, businesses can maintain a forward-looking view that extends beyond the current fiscal year, ensuring that the forecast always covers a fixed period ahead, such as the next 12 months.
Benefits of a Rolling Forecast
Rolling forecasts offer several benefits to organizations, enhancing their planning, budgeting, and making informed decisions:
- Increased Agility: Rolling forecasts enable businesses to respond quickly to market conditions, operational challenges, and emerging opportunities. This agility is crucial for staying competitive.
- Better Decision Making: By continually updating the financial forecast, companies have access to the most current data, leading to more informed and timely decisions.
- Future-Oriented Planning: Unlike a traditional annual budget, rolling forecasts always look ahead to a fixed period, such as the next 12 months, ensuring that planning is always forward-looking.
- Resource Optimization: By regularly revising the financial forecast, companies can allocate resources more effectively, redirecting them to where they are needed most.
- Risk Management: Rolling forecasts help in identifying potential risks and uncertainties early, allowing for proactive mitigation strategies.
- Strategic Alignment: They ensure that operational plans remain aligned with the strategic goals of the business, even as those goals evolve.
- Performance Monitoring: Regular updates allow for closer monitoring of performance against objectives, leading to quicker corrective actions if needed.
How to Create a Rolling Forecast?
Creating a rolling forecast involves several steps, each focused on ensuring that the forecast is accurate, relevant, and actionable. Here are the key steps a finance team can implement while creating a rolling forecast:
- Define the Time Horizon: Decide on the length of the forecast period. Commonly, businesses use 12 months.
- Select the Key Metrics: Determine the relevant financial and operational metrics like revenue, expenses, and cash flow.
- Gather Historical Data: Collect historical data relevant to the metrics like revenue and cash flow. This data forms the basis of your forecast.
- Incorporate Current Data: Update the forecast with the most current data available like the latest quarterly sales and expense data.
- Project Future Trends: Analyze trends in the historical and current data to project future performance.
- Consider External Factors: Consider external factors like market trends, economic conditions, and competition, which can impact your business
- Develop Forecast Models: Use statistical methods, financial models, or forecasting software to create the forecast.
- Review and Adjust: Regularly review the forecast with key stakeholders like the chief financial officer and adjust based on new data or changes in the business environment.
- Repeat the Process: The key to a rolling forecast is regular updates, ensuring it always covers the same time horizon into the future.
Example of a rolling forecast
A retail company starts with sales data from the past two years and notices a seasonal pattern in sales with a steady overall upward trend. They also factor in a new product launch and an expected economic downturn. With this information, they project sales, costs, and cash flow for the next 12 months. Each month, they update the forecast with the actual sales and expense data for the past month and extend the forecast one more month into the future. This rolling forecast approach allows the company to continually adapt its strategy and operations based on relevant current data and projections, helping it stay agile in a dynamic retail environment.
Best Practices for Rolling Forecast
Effectively implementing a rolling forecast is essential for better corporate performance management and requires adherence to certain best practices. These practices ensure that the financial forecast is reliable and relevant, and contribute to making informed decisions. Here are some of the best practices for rolling forecasts:
Align with Business Objectives
Ensure that the forecasting aligns with the strategic goals and objectives of the business. This helps in making the forecast a valuable tool for strategic planning.
Choose the Right Time Horizon
Select a forecasting period that makes sense for your business (typically 12-18 months). This horizon should be long enough to provide strategic insight but short enough to maintain accuracy.
Use Appropriate Metrics
Identify key performance indicators (KPIs) and metrics that are most relevant to your business. These metrics should give you a clear picture of business health and actual performance.
Incorporate Cross-Functional Input
Engage various departments (like sales, marketing, finance, and operations) in the forecasting process. This ensures that the forecast considers all aspects of the business and is not biased by a single viewpoint.
Leverage Technology and Tools
Utilize forecasting software and tools for data analysis and modeling. This can improve accuracy and efficiency, and help in handling complex data sets.
Regular Updates and Reviews
Update the forecast regularly (monthly or quarterly) and review it with key stakeholders. This keeps the forecast relevant and ensures buy-in from different parts of the organization.
Train and Educate Staff
Ensure that the finance team involved in the forecasting process is trained and understands the importance and methodology of rolling forecasts. This improves the quality of input and engagement in the process.
Be Realistic and Conservative
Avoid overly optimistic projections. It's important to base forecasts on realistic, achievable figures to maintain credibility and usefulness.
Flexibility and Adaptability
Be flexible to adjust forecasts in response to significant internal or external changes, which will help in maintaining an accurate and relevant forecast.
Analyze Variance and Learn
Regularly compare forecasted figures with actual results to understand variances. Analyze these variances to improve the accuracy of future forecasts.
Simplify the Process
While detail is important, avoid complications. A too-detailed forecast can be difficult to maintain and may not yield additional benefits.
Ensure clear communication about the forecast across the organization. Effective communication helps in setting realistic expectations and aligns everyone toward common goals.
Rolling forecasts help businesses to continuously update their roadmap. The forecasting guides finances and operations for making informed decisions, quickly adjusting to new challenges and opportunities, and ensuring the business strategy stays on track and responsive to the ever-changing business world. It's a practical, forward-looking tool that helps businesses stay agile and informed, crucial for thriving in today's dynamic environment.