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Rolling Forecasting is the New Annual Budgeting

Posted by  Sjoerd-Jaap Westra

While increasing economic uncertainty is leading to increased aversion to risk among CFOs, accepting change and uncertainty as a daily norm can help reduce the chance of storms when it comes to an organization's future. Just like weather forecasting, financial forecasts have become much more accurate with the rise of technology to support real-time data. Unlike weather forecasts though, rolling forecasting for financial professionals can be used to influence the future and bring successful outcomes for organizations. This dynamic financial strategy is the future of budgeting for companies of all sizes if they want to convert strategy into execution.

Rolling Forecasts Roll with the Punches

Often, organizational leaders make the mistake of putting the emphasis on predicting the future rather than changing it. This sets up a mindset for failure if the predicted outcome doesn't materialize. It won’t allow them to convert strategy into execution either. But a rolling forecast poses a new framework that rolls with changes taking place now and can help CFOs make better, more relevant, strategy driven decisions.

Rolling forecasts:

  • Are dynamic and adapt well to change
  • Can pinpoint hits and misses in the budget
  • Produce clear ownership and reduce silos
  • Focus on actual business operations rather than financial variances
  • Chart a forecast for success instead of being a mandatory exercise
  • Enable organizational leaders to compare strategic objectives and actual predictions
     

A Financial Strategy That Adapts to Change

A rolling forecast doesn't limit an organization the way a traditional fiscal year does. Instead of having a set 12-month budget period (or longer), a rolling forecast replaces the previous month with a new one tacked on at the end of the period. This keeps the budget fresh and relevant because it's not just using a mandatory period but instead being updated with real-time data. CFOs can use this to the organization's advantage by creating forecasts that act as living documents rather than static fiscal year plans. The emphasis moves from countdown status to the ability to make timely tweaks as they're needed.

Rolling forecasts give organizations:

  • Accuracy through relevancy: Modifications can be made immediately instead of having to wait until the yearly budgeting meeting.
  • Agility through flexibility: Time-sensitive decisions don't have to wait until the decision is no longer important or relevant.
  • Drive instead of ride: Driver-based predictions mean CFOs can take the driver's seat instead of just looking in a rear view mirror or disclosing predictions.

 

Key Factors to Consider When Making the Change

Financial data needs to be readily available for rolling forecasts to work. Automated processes and integrated systems, like those utilizing the cloud, make this strategy exponentially easier and more efficient. For example, data gleaned from customers can be more realistic than management predictions because managers will do what they can to align budgets with wants instead of needs. Integrated data will show the actual needs and any shortfalls that weren't previously identified.

Companies that are transitioning from a traditional, fiscal year budget strategy will need to determine when they want to evaluate performance. Because rolling forecasts ditch the idea of a single yearly evaluation, organizations that are accustomed to annual mindsets will need to convert the thought process to a more frequent timetable. Deciding on the frequency ahead of time will ease this process and drive success.

Just as important as frequency of evaluations, KPIs should also be clearly identified and derived from strategic objectives prior to a rolling forecast "rollout." Standardizing how performance is evaluated will align the forecasting models consistently and help consolidate forecasts. This can be especially helpful in the transition from a traditional fiscal year strategy so as not to overwhelm managers who may see the change as a full-blown yearly report that has to be performed every month. Identifying KPIs avoids that problem and reduces unnecessary stress while also compiling what's needed.

Change isn't always easy, but in the long run it can mean the difference between failure and success, the difference between looking back and driving forward. Using a rolling forecast helps leave failure in the past where it belongs, leaving a horizon full of future success.

Sjoerd-Jaap Westra

Sjoerd-Jaap Westra

Within global product marketing of Unit4, Sjoerd-Jaap is responsible for the 'Office of the CFO' suite. This suite contains best-in-class solutions for financial management, planning & control management, and corporate performance management.

 

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