To thrive as a business, you need to be able to predict your future earnings and expenses, so you can make smarter business decisions. Yet, while financial forecasting is imperative to the success of businesses, accurate financial forecasts are difficult to create. So, how does a high-growth, dynamic business create accurate forecasts for their company, without exhausting their time and resources in the process? A whitepaper entitled, "Best Practices in Rolling Forecasts," sets out to answer these very questions.
But first, lets look at budgeting. Financial budgeting is the process of allocating resources based on projected sales, headcount, capital and operating expenses, in order to achieve financial objectives. Static budgets rely on set periods, a fiscal year for example, and create a fixed forecast for that period. Rolling forecasts, as an extension to financial budgeting, support periodic updating of budget assumptions, and extend the time period out beyond the end of the fiscal year. By continously forecasting out 4 - 6 quarters, you can avoid the "fiscal year cliff" and give your organisation a head start on next year's budget. Rolling forecasts are extremely beneficial, particularly for large and dynamic enterprises that have to perpetually alter their budgets and plans to adapt to new trends. Rolling forecasts allow for more accurate and versatile forecasting that will remain true to a company, even amid fluctuations in the industry, economy, or marketplace, providing a flexible framework that is routinely updated, so all variables and industry changes can continually be accounted for.
10 Best Practices for Rolling Forecasts
The whitepaper outlines these best practices for rolling forecasts that will enable large enterprises to reduce the time and effort of forecasting, while increasing accuracy.
1. Don't rely exclusively on Excel. Excel isn't colloborative enough to sufficiently generate accurate forecasts, and it doesn't provide the flexibility needed for dynamic industries. Instead, your company needs a system that will factor in variables, enable fast iterations to the forecast, and serve as a baseline for future forecasts. Collecting data via Excel requires too much time and effort while being prone to errors, resulting in tedious budget cycles and inaccurate forecasts.
2. Outline your goals. The core objectives of forecasting are to establish a clear view of your company's financial future to help inform business decisions, as well as to understand the potential impact of those decisions prior to implementing them. Your company should consider your primary goals with the forecast, so you can understand the drivers behind each objective and create better-focused plans.
3. Settle on a duration. Determining the appropriate duration will largely depend on the needs and goals of your company. Consider whether quarterly forecasting is sufficient or if monthly forecasts are needed. How far out should your forecasts project - 12 months, 15 months, 18 months? The growth rate and industry fluctuations of your business can help to determine the best durations for your company.
4. Choose your comparison periods. Comparisons for rolling forecasts can be trickier than with static budgets. You need to provide annual comparisons, comparing year to date (YTD) this year to last year, as well as comparing each month of the rolling forecast to the actual results from that month. While it sounds labor-intensive, Enterprise Performance Management (EPM) software can greatly simplify the process, making it much more efficient to accomplish.
5. Determine what is driving the revenue and expenses of your business. To ensure accuracy, rolling forecasts need to be driver-based, so you can gain the flexibility and agility needed to respond to internal or external fluctuations, update the budget quickly, or generate alternate forecasts. The idea here, is that instead of budgeting or forecasting every line in your revenue or expense budget, you identify the key "drivers" that impact many other line items and focus on them. By linking other line items to the key "drivers", planners can focus their forecasting efforts on material factors, such as orders or sales reps, and see the impact that changes to these line items have on the overall budget or forecast.
6. Separate capital and strategic projects from your forecast. Capital and strategic projects don't typically fit into the timeframe of rolling forecasts because they can often last over multiple years. Additionally, they contain a number of variables, which could result in increasing or decreasing the budget for those projects as needed. As such, they should be planned separately from the forecast, while being integrated into the overall plan.
7. Start small and incrementally phase-in new departments. Rolling forecasting can be challenging to implement initially, so it's best to start small. Begin with just a couple of departments, and as those departments establish a solid routine, you can phase-in more departments. Slowly implement rolling forecasts to ease the transition process.
8. Use the rolling forecast as a baseline. The rolling forecast should be a baseline for future budgets. It can provide the framework needed to model what-if scenarios, adjust values, and plan for future circumstances.
9. Integrate your forecasts into your strategic plans. By integrating your rolling forecasts and strategic plans together, you can connect company finances with the overall goals of the organisation, providing a much clearer picture of the business.
10. Consider external factors and variables that will impact forecasting. There are countless external factors that can negatively or positively impact forecasts, all of which should be considered in advance. Rely on external market trends and indicators to determine the primary external factors that are driving your business.
For high-growth businesses, static budgets cannot provide the agility and flexibility needed to ensure optimal allocation of resources. Rolling forecasts can provide the agility needed to update planning assumptions regularly, better insights into the financial impact of decisions, and create a clearer vision of the financial future of your company. Excel fails to provide the tools and versatility that enable efficient and accurate rolling forecasts.
