When is a rolling forecast right for my business?

What's the difference between a rolling forecast and a static budget?

Budgets are the bedrock of planning.

Not only can they help companies allocate resources to meet their strategic goals, but they also create accountability for teams to spend resources responsibly.

The challenge with static budgets is that they take a “set it and forget it” approach.

They’re generally created towards the end of the prior fiscal year using data available at that time. From there, the budget remains unchanged for the next year.

Because of its static nature, a traditional budget can become outdated and stale within just a few months of rollout.

How do businesses overcome this challenge? Enter: the rolling forecast

As the business evolves, a rolling forecast evolves with it. It’s a living, breathing document that is always updated for, say, 12 months out, with most companies rolling it forward each month or quarter.

Forecasting compliments the budget by consistently evaluating projections based on the most up-to-date information.

Some companies may not realize they already have a rolling budget, it’s just buried in that “master Excel model” on someone’s desktop that’s updated every time a major change is identified.

As an example, take the COVID-19 pandemic. Suppose a company in the restaurant supply industry, perhaps a large supplier to restaurants, created its budget in October 2019.

In 2020, they likely expected to see business as usual or even steady growth. Once March of 2020 came about, all of that changed and it was unlikely that their budget had any ground to stand on. Their business would have likely failed if they had stuck to their original budget and continued spending resources as initially planned.

Instead, creating a forecast and updating it with industry data as it changes throughout the year would have allowed that company to shift its focus and reallocate resources as needed. The rolling forecast would be the ultimate saving grace to the business.

While COVID-19 was an outlier, every business can benefit from forward-looking data and accurate projections throughout the year.

Why implement a rolling forecast?

There are plenty of good reasons to do rolling forecasts.

Here's a sampling:

React to changes

A rolling forecast enables a company to adjust its approach to meeting goals as new information is learned throughout the year.

Instead of relying solely on a static budget to guide their decisions, leadership can react to the fluctuations or uncertainty that may be driving the economy and industry.

With accurate and up-to-date data, companies can determine if company resources need to be reallocated in order to stay on track.

With market conditions changing frequently, it’s crucial that organizations can react to those shifts and adapt to new demands or trends.

Make informed decisions

An updated quarterly or monthly forecast allows business leaders to make strategic decisions with the best information available.

Rolling forecasts allow leadership to quickly adjust spending in response to current market data.

This creates a better planning environment and helps the company stay ahead of the curve while they navigate economic changes.

Set realistic goals

With a rolling forecast, plans are updated on a regular timeline to project what the future holds.

Since it’s an ever-evolving document with regular updates, it creates an easy way to maintain a realistic set of strategic goals. As new information is considered, it may be determined that prior goals are no longer realistic for the company.

A rolling forecast can keep the company moving towards success, even if the targets shift along the way.

9 Steps to developing and managing a rolling forecast

Setting up a rolling forecast can be daunting.

That's why we simplified the process into 9 simple steps.

They're all right here.

1. Determine the end goal

Creating a rolling forecast is similar to undergoing any other planning process.

Creating an objective helps the Finance Team decide how the forecast will be used and what decisions will help.

Knowing that information will help tremendously as the team navigates through the next several forecasting steps.

2. Set the horizon and increments

A rolling forecast’s horizon decides how far the forecast projects data into the future. The increments determine how often the forecast is rolled forward.

The dynamic nature of a business combined with a company’s sensitivity to market conditions decides both the time horizon and increments for a rolling forecast.

Businesses that are very dynamic and sensitive to market conditions might need to react to market changes more rapidly than a more static and stable business.

For example, a cell phone service provider may not experience great fluctuations in business during economic shifts because they provide something that most people view as a necessity.

However, a meal subscription service may experience greater volatility during market shifts as consumers look for ways to improve their cash flow when finances become uncertain.

In this example, a cell phone provider likely won’t need to roll their forecast as frequently as a meal subscription service.

The more dynamic the company and the higher the market sensitivity, the more frequently the forecast should be rolled. Most companies choose to have a time horizon of 4 to 8 quarters.

3. Decide on the detail level

Each company has a unique perspective on how detailed a forecast should be.

The level of detail should be based on how detrimental a poor decision based on bad data would be to the company.

If there is a high risk of significant consequences, then it’s imperative that the data be as accurate as possible while providing as much detail as possible.

While this can be more time-consuming for the finance team, it will undoubtedly help the company move closer to its strategic goals.

4. Engage key contributors

A rolling forecast’s success is only as good as the data that goes into it, like its drivers and assumptions.

The best people to provide updates to drivers and assumptions are the managers and contributors throughout the organization.

The finance team should take the time to include key stakeholders in the forecasting process and provide a clear set of templates and process guidelines for those contributors.

5. Identify quantitative and non-quantitative assumptions

Rolling forecasts should provide more interpretive data than a static budget.

Where a budget might list thousands of lines of data, forecasts need only focus on what pieces of the business are most impactful – these are often referred to as key drivers and assumptions.

Rather than dive into how many pens were purchased for the office in a given quarter, leadership may want to know how many new subscriptions were gained for their service or what the price per unit was for a product.

6. Gather the data

Rolling forecasts generally start with a fully completed budget.

Budgets are a starting point and reference to roll out the first new forecast. Forecasts use the actual figures from each period and are typically rolled every quarter unless the business or market changes rapidly enough to justify a monthly update.

When gathering the data for the forecast, it’s important to thoroughly vet each source.

Industry statistics and developments will be used to project the future.

Rather than relying on any random source, work to utilize credible information verified by industry leaders to ensure a quality forecast and alleviate the risk of poor decisions.

7. Establish scenarios

The best part of a rolling forecast is the ability to consider a wide array of scenarios and what-if analysis tests.

Using different scenarios, the Finance Team can project a range of possibilities and determine their impact on company finances. Each time the forecast is rolled forward, the scenarios can be tweaked and adjusted based on the newest information available.

One best practice we recommend is to have an ever-evolving “Base Case” forecast.

That Base Case can then be copied and saved when a rolling forecast is locked.

For example, if a company forecasts monthly, the base case would be copied at the end of each month for the Jan Forecast, Feb Forecast, March Forecast, etc.

8. Institute a regular variance analysis process

Sometimes referred to as “Performance Management” or “BvA”, tracking actual performance and comparing it to the forecasted data on a regular basis will help leadership understand which targets were met or not and why it happened.

This is called variance analysis.

A more reliable projection can be made for the next forecast using that information.

Variances are a normal part of forecasting.

What’s important is that the finance team reflects on the reasons for the variances and what can be done about the future and then pivots to accommodate those answers. Variances should be analyzed for both failures and successes.

9. Course correct

Each time a variance is found and the forecast shows a different result than initially projected, it’s important to course correct.

This agility helps the company overcome its challenges and prepare for what is likely to occur. Course-correcting can often involve cutting costs in one area to double down or reallocate resources to a different area of the company.

Conclusion: keep it rolling

Creating and implementing a rolling forecast is the perfect complement to a static budget.

While a static budget can provide the detail behind each line item, a rolling forecast offers projections based on current business data and market trends.

It allows companies to react to their environments quickly while upholding realistic goals.

While many companies fail to implement this living document due to its complexity and time commitment, those that do are in an exponentially stronger position to succeed.

With some extra attention, a rolling forecast can help companies hit the mark and realize their strategic goals more consistently.