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.
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.
Rolling forecasts offer several benefits to organizations, enhancing their planning, budgeting, and making informed decisions:
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:
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.
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:
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.
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.
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.
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.
Utilize forecasting software and tools for data analysis and modeling. This can improve accuracy and efficiency, and help in handling complex data sets.
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.
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.
Avoid overly optimistic projections. It's important to base forecasts on realistic, achievable figures to maintain credibility and usefulness.
Be flexible to adjust forecasts in response to significant internal or external changes, which will help in maintaining an accurate and relevant forecast.
Regularly compare forecasted figures with actual results to understand variances. Analyze these variances to improve the accuracy of future forecasts.
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.