Written by Robin Dehondt
In my previous article, I advocated a more agile approach to budgeting called beyond budgeting. Beyond budgeting splits the conflicting objectives in three separate processes (accurate forecasts, stretched targets and dynamic resource allocation). One of the cornerstones to make beyond budgeting work is to implement accurate, rolling forecasts.
A rolling forecast is a forecasting process that involves continuously updating and adjusting predictions for future financial performance (see exhibit 1). This approach is becoming increasingly popular among businesses and organizations as it allows them to stay agile and adapt to changing market conditions.
For instance, imagine a very simple rolling forecast that predicts the P&L for the next 4 months. In the first months of the year, the market seems to struggle and sales is lower than expected. The trend-driven revenue forecast takes this information into account and consequently predicts lower revenue for the next 4 months. Now, the company can anticipate this lower revenue, and react by cutting the appropriate costs in order to sustain its EBITDA target.
Exhibit 1 - Rolling forecasts are updated on a monthly basis, using the latest actuals to adjust future financial performance
One of the key advantages of rolling forecasts is that they provide more accurate and relevant predictions compared to traditional forecasting methods. Traditional forecasting typically involves making predictions based on past performance, which can be misleading if the market conditions or business environment changes significantly. Rolling forecasts, on the other hand, are updated regularly and incorporate the latest information, providing a more accurate picture of what is likely to happen in the future.
Another benefit of rolling forecasts is that they allow businesses to be more proactive in their decision-making. By regularly updating their forecasts, businesses can identify potential risks and opportunities earlier, allowing them to take action to mitigate risks and capitalize on opportunities. This can help to improve the overall performance of the business and increase its chances of success.
Implementing a rolling forecast also requires a different mindset and approach to forecasting compared to traditional methods. It requires a more collaborative approach, with different departments and teams working together to gather and analyze the latest data and information. This can help to improve communication and coordination within the organization and provide a more holistic view of the business.
The rolling forecast should follow the agile principle that pieces of the P&L are built incrementally, such that they do not need to be updated with the same frequency. Revenues are typically highly volatile and should be updated at least monthly. Rental costs are much more stable and can be updated on a quarterly or yearly basis.
Since some pieces of the rolling forecast require more frequent updates, it is important that the company leverages the latest automation techniques such as artificial intelligence to keep the workload at a minimum.
Overall, rolling forecasts are a valuable tool for businesses that want to stay ahead of the curve and adapt to changing market conditions. By regularly updating and adjusting their predictions, businesses can improve their decision-making and increase their chances of success.
Need help in implementing a rolling forecast or the beyond-budgeting approach? Do not hesitate to reach out to our finance expert, Robin Dehondt.