In an increasingly fast-paced business environment, has the traditional annual budgeting and forecasting process become an outdated model? The financial crisis of 2008 bared the shortfalls of making static assumptions months ahead of time: forecasts ended up worthless, and many companies had no process in place for reforecasting on the run. Since then, expectations for CFOs have changed drastically. Finance offices are expected to sift through unprecedented levels of information and reforecast quickly in response to market fluctuations.
The benefits of faster, more accurate forecasting are clear. During an energy market downturn, an E&P company implemented a Hyperion Planning application that allowed them to make real-time updates during board meetings and realign spending priorities. At a time when oil prices were plummeting, this company could not afford to spend 2 weeks on a planning cycle. “Our group is now delivering 50 times the information and analytics, 50 times faster,” said a Strategic Planning Engineer.
To increase agility, many companies are adopting methodologies like zero-based budgeting and rolling forecasts. These are powerful tools for FP&A — if used correctly. One in five of the organizations that implemented rolling forecasts recently have abandoned them because they were more complex than initially expected. In this blog post, we’ll answer common questions around getting started with rolling forecasts.
What is a rolling forecast?
Rolling forecasts allow for continuous planning with a constant number of periods. For example, if your forecast period lasts for 12 months, as each month ends another month will be added. This way, you are always forecasting 12 months into the future.
Rolling forecasts usually contain a minimum of 12 forecast periods, but can also include 18, 24, 36, or more.
Why use rolling forecasts vs. traditional budgeting?
The biggest difference between rolling forecasts and the traditional budgeting process is that annual budgets determine the plan for the entire upcoming fiscal year. Coming up with an annual budget is a long process that takes a lot of research and ties up resources — then the rest of the year becomes a countdown to the next budget.
Conversely, you should think of rolling forecasts as a living document. No longer are you spending all that time coming up with the annual budget. Instead, you’re making decisions throughout the year for a set time span. There’s no countdown and you’re always looking ahead, able to make tweaks to your budget as predictions change.
Even if you view traditional budgeting and forecasting methods as sufficient, there are many advantages to using rolling forecasts:
A common complaint about traditional annual budgeting is that by the time it is completed, it’s already irrelevant. Rolling forecasts allow you to make quick tweaks along the way rather than letting mistakes mount up and only giving yourself one shot to make those changes annually.
Rolling forecasts allow you to adjust the forecast to accommodate recent changes or trends, meaning you’re able to respond better to time-sensitive decisions. Because your outlook is updated continuously, you’ll always have long-term data available when your organization needs to make an important business decision.
With rolling forecasts, your predictions are no longer based on past results. Rather, your metrics like category growth, market share, human capital, and customer satisfaction are fed into your system. Any fluctuations to operational activities can be accounted for throughout the year, instead of just once. Being able to add these key business drivers to your forecasting will allow you to improve your forecast quality.
What challenges come with rolling forecasts?
Unfortunately, many companies are resistant to move away from traditional forecasting methods. The emphasis Wall Street places on quarterly earnings motivates organizations to stick with traditional budgeting.
When companies do decide to start using rolling forecasts, they face a few additional challenges. Preparing to start using rolling forecasts can cost time and money if your forecast process isn’t already automated. Accountants will need more training, and their workload will probably increase if they’re doing constant forecasting throughout the year. Your organizations will also need to figure out how to evaluate performance, since it won’t be looked at during one specified time every year.
Fortunately, there are tools to help automate your processes, such as Hyperion Planning and Oracle Planning and Budgeting Cloud Service (PBCS).
Would my organization benefit from rolling forecasts?
Companies looking to improve their planning process should carefully choose a methodology that best fits their organizational structure, leadership culture, and marketplace. Here are some questions to consider:
- Is your marketplace dynamic and adapting to change difficult for your organization?
- Has your company or department missed its plan and the reasons why are unclear?
- Does the current budgeting process seemed siloed and lack clear ownership?
- Do budget conversations focus more on financial variances and less on how the business is operating or how customers are serviced?
- Does the current budgeting process seem like an exercise rather than a process to chart a course for success?
- Are your budgets based on assumptions that usually turn out to be wrong?
- Is your annual budget time consuming, taking more than three months to complete?
Responding “yes” to any of these questions suggests a need for improvement — and an opportunity to develop a more effective management process.