Forecasting is a critical part of strategic planning for any business, as it provides a roadmap to navigate the dynamic finance market. As businesses are constantly turning to innovative techniques to keep up with the ever-changing market trends and the competitive marketplace, rolling forecasts play a significant role in their success
Rolling forecasts are not your traditional, static financial projections that remain fixed for an entire year or more. Instead, they represent a dynamic and responsive approach to forecasting that aligns more closely with a changing business environment.
In this article, we’ll explain the concept of rolling forecasts, exploring how they differ from traditional budgets, and how a business striving for agility and success should make use of it.
Rolling Forecasts: What to Know
A rolling forecast is a financial planning technique that involves regularly updating forecasts with actual performance data and extending financial projections beyond a fixed time frame. Unlike traditional budgets that cover a specific fiscal year, rolling forecasts maintain a continuous and flexible planning horizon by adding a new forecast period and replacing the oldest ones with actuals as time progresses. This helps give businesses an ongoing and up-to-date overview of their financial future.
Rolling forecasts are typically used for a period of 12 to 18 months, with regular updates often quarterly or monthly. This means that, for instance, when the first quarter of the year concludes, the forecast for that quarter is replaced with actuals, and a new forecast is added for the subsequent quarter, maintaining a continuous and overlapping outlook into the future while layering actual performance.
Rolling forecasts are especially beneficial for industries with volatile market conditions, such as technology, finance, or retail. In these sectors, rapid adjustments to financial planning are essential to stay competitive.
To implement rolling forecasts effectively, businesses need robust financial planning and analysis (FP&A) tools, as well as a culture of continuous improvement and adaptability. This shift in mindset and approach can lead to improved financial performance, greater responsiveness to market changes, and a more agile and forward-thinking business strategy.
What are the benefits of a rolling forecast?
Rolling forecasts offer several benefits, making them a valuable tool for modern financial planning. Here are some reasons you should start implementing rolling forecasts:
- Agility: Rolling forecasts provide businesses with the ability to adapt quickly to changing market conditions, competitive pressures, or unexpected events. This agility allows companies to seize opportunities and address risks more effectively.
- Real-Time Decision-Making: By incorporating the latest data, rolling forecasts empower decision-makers with up-to-date insights, enabling them to make timely and well-informed choices.
- Resource Allocation: Rolling forecasts support flexible resource allocation, ensuring that resources are directed to areas where they can have the most significant impact.
- Strategic Alignment: The continuous communication and adjustment process inherent in rolling forecasts fosters alignment with an organization's strategic objectives. This keeps all teams and departments focused on shared goals and encourages collaboration.
- Reduced Burden: Traditional annual budgeting can be a time-consuming and labor-intensive process. Rolling forecasts reduce this burden, making financial planning more manageable and less disruptive.
Rolling Forecasts vs Traditional Budgeting
The key difference between rolling forecasts and traditional budgeting lies in their approach to time frames and adaptability. Rolling forecasts offer a more dynamic, data-driven, and agile approach to financial planning, while traditional budgeting is characterized by fixed time frames and a more rigid structure. Here are some crucial distinctions between the two methods:
Time Frame
Traditional budgeting adheres to a fixed time frame, typically covering a fiscal year or another predetermined period. Once set, the budget remains unchanged for the duration of that period.
However, rolling forecasts extend beyond a fixed period, offering more dynamic and adaptable planning. The oldest forecast period is continuously replaced with actual performance, and a new one is added as time progresses, ensuring an ever-evolving view of the future.
Frequency of Updates
Traditional budgets are created as an annual process, involving the development of budgets for the upcoming fiscal year. Changes and adjustments are infrequent and usually occur only at the start of a new budget cycle.
On the other hand, rolling forecasts are updated regularly, typically on a monthly or quarterly basis. This ongoing process enables organizations to adapt to changing conditions and make continuous adjustments to their financial projections.
Rigidity and Adaptability
Traditional budgets tend to be rigid and less adaptable. They can make it challenging to respond to unexpected circumstances or take advantage of emerging opportunities. Mid-year adjustments may be required for significant budget deviations.
In contrast, rolling forecasts are highly agile and responsive. They provide a mechanism for proactive decision-making based on real-time data and changes in the market, enabling organizations to seize opportunities and mitigate risks more effectively.
Resource Allocation
Traditional budgets often result in fixed resource allocations based on historical patterns and predefined targets. This can lead to inefficient resource utilization and a "use it or lose it" mentality in departments.
However, rolling forecasts encourage dynamic resource allocation. Resources are allocated based on performance and need, allowing for more efficient utilization and flexibility to adapt to changing priorities.
Strategic Alignment
Traditional budgets may not effectively align with an organization's strategic objectives, as they are often set at the beginning of the fiscal year and may not reflect changing circumstances.
On the other hand, rolling forecasts promote ongoing alignment with strategic goals. Regular updates and discussions among departments and teams foster collaboration and ensure that everyone is working towards shared objectives.
Best Practices for Using Rolling Forecasts in Strategic Financial Planning
Rolling forecasts are an increasingly essential part of the strategic financial planning of any business providing the competitive edge needed to thrive. Whether it's seizing emerging opportunities or proactively addressing potential challenges, here's how to best implement rolling forecasts in your next budgeting:
Continuous Updates
Maintaining the flexibility to adapt to rapidly changing conditions is paramount and this is precisely where rolling forecasts are vital. As a critical component of strategic financial planning, update rolling forecasts regularly to help you remain agile and responsive to market trends, competitive pressures, and unforeseen events while mitigating risks proactively.
Seamlessly Transitioning with Overlapping Periods
Prioritize the transition process from one forecast period to the next, ensuring that this step is seamless. Rather than making abrupt shifts in financial planning, maintain a sense of continuity by leaving no gaps. This prevents disruptions and enables you to build on existing plans and make necessary adjustments as you go.
Scenario Analysis
When it comes to scenario analysis, adjust revenue projections, expense levels, or capital investments on your financial dashboard to see how different assumptions play out in practice. This enables informed decision-making, helping you evaluate potential outcomes under various conditions as well as mitigate risks and capitalize on opportunities.
Data-Driven Decision-Making
Rolling forecasts have a strong foundation in data-driven decision-making, equipping decision-makers with up-to-the-minute insights into the financial health of the organization.
However, they rely on the latest data from diverse sources, including sales figures, market trends, operational metrics, and economic indicators, which is why it is crucial to prioritize the quality, relevance, and timeliness of the data.
Ensure that the data is accurate, up-to-date, and aligned with the specific decision at hand by focusing on the selection and application of appropriate analytical methods and tools.
The use of rolling forecasts empowers businesses to navigate change effectively. But it's essential to use the right financial reporting software to maintain up-to-date financial projections and smoothly transition between periods with real-time data.
Jirav's cutting-edge features are designed to seamlessly align with your current systems, equipping your teams with dynamic insights and the ability to make informed, strategic decisions. Book a demo today and explore how our innovative approach can empower your strategic financial planning to thrive in an ever-changing market.
