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Rolling forecasting – FP&A wants it for sure, but does anyone else?

Posted by  Amrish Shah

What is this article about?

We're going to explore what the consequences and costs that a move to rolling forecasting has for the other actors involved in the process.

Why is it relevant?

The traditional approach to once a year annual planning supplemented by a number of in year reforecasts has come under increasing criticism. Part of the frustration comes from the input side around the time consumed to create plans. This might even be acceptable if the value generated would be meaningful. But this is increasingly not the case. Due to firstly, the change in business requiring better and quicker feedback. And secondly, the fixed mindset that come with fixed internal targets stands directly in the way of the cultural shift required to foster more flexibility, agility and risk taking in the organization.

Rolling forecasting promises to address some of these issues.

What are the key considerations?

A rolling forecast is DIFFERENT from a traditional forecast in that:

  • The future time period stays the same for every forecast
  • It is not tied to a financial target that is linked to any incentives

A rolling forecast MAY or MAY NOT be different to a traditional forecast in:

  • The level of details involved
  • The extent of cross organization collaboration
  • The balance between financial versus operational drivers

The focus then of a forecast becomes one of showing a realistic picture of where the organization is now and can expect to be in the future period and how that deviates from any budgeted targets and commitments made to external stakeholders. The focus of a ROLLING forecast goes beyond this by casting the beam beyond any arbitrary cut-off date.

Remembering that a rolling forecast is a management tool to help decision making around resources and priorities. Therefore, the forecast is also by definition by and for the business. The role of FP&A is around process leadership which tackles the following elements:

  • Process design balancing cost and value (as simple as necessary - EFFICIENCY)
  • Process governance (involvement of right people at right time for the right decision - ENGAGEMENT)
  • Process quality (quality of outputs meeting expectations – EFFECTIVENESS)

I see three areas of risk and concerns.

  • Transparency: A rolling forecast demands a greater level of transparency on a more consistent basis.  It drives greater accountability for the plans. For those responsible for the business areas involved this can lead to quite some discomfort.
  • Time requirements: The elements of balancing a medium-term outlook does require more time spent on the managerial tasks of risk management and strategic decision making. This can be at the expense of time dealing with operational issues.
  • Same wine in new bottle: If the rolling forecast is seen as just another tool mandated by Finance and it fundamentally does not change the direction and quality of the performance discussion and decision making, then it will remain an immense source of frustration.

Mitigating the risks

A rolling forecast is a tool like any other. Which means it needs to be used at the right time for the right purpose. Dealing with the issues that increased transparency may lead to any passive resistance is a leadership imperative, not just a Finance one. A culture of transparency for the sake of learning needs to be embedded as opposed to a focus on measuring forecasting performance for the sake of blaming. For the same reason to make sure rolling forecasts are driving a qualitatively and quantitatively different discussion, the leadership team has to set the tone and expectations clearly. The CFO needs to play a very important role here. Where FP&A can really address misgivings is in balancing the inputs versus the outputs. Going back to their leadership of the process design, FP&A has to think deeply about the right design choices for a rolling forecast and manage the communication and transition for the business.

Can technology play a role in the solution space?

The use of algorithms to generate statistical baseline forecasts has improved dramatically. In-memory computing, data visualization tools, predictive analytics are all developments which can definitely reduce the time taken to generate forecasts whilst generating more robust forecasts. One watch out has to that doing these requires deep organizational integration – in order to avoid the “black box” trap. It requires an investment in not just advanced analytic capabilities but the basic plumbing of data management as well as the integration of the human intelligence aspect from the business perspective. This is a significant change management challenge.

Summary

In this article I have tried to show that whilst rolling forecasts have clear benefits, any successful implementation of it needs to recognize the same causes of resistance to more traditional forecasting and even budgeting. In essence, these are social and organization challenges not technical ones. Until some of these organizational challenges are sufficiently addressed, the impact of rolling forecasts will still be limited.

Amrish Shah

Amrish Shah, of Indian origin, born in Africa, a British national and now residing in The Netherlands, is a seasoned and senior finance leader with over 20 years of financial management experience in international organizations. Some of the companies he has worked for include Unilever, O'Neill Group, Staples, Royal Wessanen, Kao and he is currently working in a senior FP&A transformation capacity at EndemolShine.

A qualified Management Accountant with CIMA, he has held regional finance leadership positions since 2001, based out of The Netherlands. He has held both staff and line roles, managing teams of up to 40 people. He has a clear belief in the value of finance at both strategic and operational levels to the organisation and is passionate about, amongst others, organisation decision making, organisation culture, high performing teams, leadership in general, organisation and finance transformation, change management and talent management.