Forecasting plays an important role in the financial planning and analysis (FP&A) process. However, modern practices in FP&A have led to the development and widespread adoption of rolling forecasts. This management tool allows organizations to continuously plan and having a basic understanding of rolling forecasts will pay dividends.
In this FAQ we will cover what rolling forecasts are, why they are important, how they are different from traditional forecasts, and the best practices to adhere to when creating one.
What Is A Rolling Forecast?
A rolling forecast is a dynamic type of forecast that continuously projects twelve months into the future at the end of each calendar quarter or some other defined period of time. The approach relies on historical data to assist in predicting what the future values will be.
Typically, a forecast is made with the assistance of a budget and remains static for the twelve months initially forecasted. The rolling forecast differs from this in that it continuously adjusts itself over time.
Additionally, rolling forecasts are not bound to the finance industry. In fact, this method of forecasting is used in supply chain management and in other plans across various departments.
Why Are Rolling Forecasts Important?
The need for responsive and flexible planning tools is essential for today’s businesses to operate successfully. As technology has created new ways for consumers to locate and purchase products and services, many business environments have become extremely competitive and unpredictable.
While budgets will always act as a map that assists business leaders in navigating these challenging conditions, forecasts will continue to act as the compass. In general, the use of a forecast is to assist leadership in understanding if the business is following the path set forth by the budget.
The rolling forecast has some primary benefits over traditional forecasting in that it is dynamic and responsive to current business conditions. Because it is continuously adjusted it takes into account the most recently available financial data to adjust future predictions.
One of the shortcomings of traditional budgeting is that they do not react to current business conditions during the forecasted period. Instead, they are monitored and often used for variance analysis. Additionally, traditional budgets can create an environment that promotes maximizing budgets over minimizing them.
Rolling forecasts serve to address the various shortcomings of traditional budgeting as it constantly re-calibrates itself and adjusts the allocation of resources based on what actually occurred during the period. This promotes an environment where resources are allocated in the most efficient way.
Rolling Forecast Best Practices
Even though each business approaches financial planning and analysis differently, they typically all adhere to industry best practices. Rolling forecasts are no different, and while there might be some industry-specific or even business-specific process, there are still some foundational principles that are good to know before creating one.
Employ The Use Of A CPM System
While excel has remained an industry standard there is significant benefit in using a corporate performance management system in conjunction with excel when creating rolling forecasts. Spreadsheets can create inefficiencies as they grow and are prone to manual input errors. By consolidating your data source into a unified location that allows you to access information instantaneously it can eliminate the limitations that excel has.
Automate Where Possible
Because the rolling forecast is continuously updated, it can layer in large resource demands on your finance team. These demands, in conjunction with other reporting requirements, draw the attention of finance professionals from analysis to data management. Traditionally, budgets and forecasts were created and then uploaded into some form of enterprise resource planning software. Most modern CPM software can perform these tasks autonomously. By automating processes wherever possible, it helps reduce the demands placed on your finance department.
Determine Forecasting Time Horizon
Rolling forecast timeframes can be adjusted to suit the needs of your business. Every forecast is bespoke to the business it is for, and rolling forecasts are no different. Select a time horizon that makes sense for your business model and industry. Rolling forecasts can be made for twelve months into the future or for as little as one week into the future.
In general, more cyclical businesses might be able to rely on longer time horizons, where more dynamic or sensitive businesses might require short-term forecasts.
Use Drivers And Not Revenue To Roll Your Forecast
Usually, forecasting involves breaking down revenue and expenses into the relevant drivers behind them. This differs from simple top-line forecasting which bases changes in the forecast off of a percentage of revenue and relies on adjustments to gross revenue for forecasting. Most financial modeling relies on the use of drivers as a best practice and the rolling forecast is no different.
Using Datarails, a Budgeting and Forecasting Solution
Datarails FP&A software replaces spreadsheets with real-time data and integrates fragmented workbooks and data sources into one centralized location. This allows users to work in the comfort of Microsoft Excel with the support of a much more sophisticated data management system at their disposal.
Every finance department knows how tedious building a budget and forecast can be. Integrating cash flow forecasts with real-time data and up-to-date budgets is a powerful tool that makes forecasting cash easier, more efficient, and shifts the focus to cash analytics.
Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced data management tool that can help your team create and monitor cash flow against budgets faster and more accurately than ever before.