As businesses get ready for their first quarterly board review of the new year, the CFO may be wondering “How can we be so far off of our budget numbers already?” Even if your company is still holding close to the numbers approved just months ago, every office of finance knows that soon they will be digging through data to understand how the company’s actuals deviated from the annual budget plan. These are exactly the kinds of concerns that a rolling forecast is meant to address.
The implementation and features of a rolling forecast to your forecasting process, with its frequent updates and driver-based approach, increase a business’s ability to adjust when an opportunity arises or an unforeseen challenge appears.
On paper, rolling forecasts seem like a silver bullet to the problems of an annual budget. But if that’s the case, why is it that Gartner reports 52% of managers at companies using rolling forecasts are dissatisfied with the process? Many times, it’s because proper care wasn’t used when adopting the new process.
Best Practices for Rolling Forecasts
In truth, there are only a few things that need to be carefully planned and executed to successfully implement rolling forecasts as part of your financial planning. Unfortunately, they are all fairly large considerations. One of the most important elements of rolling out rolling forecasts is the willingness to do it in stages. Rolling forecasts are not an all or nothing proposition and can work well alongside an annual budget while the company eases into a new way of doing things.
Define Your Forecast Timeline
As the name implies, rolling forecasts are continually updated; as one time period ends, a new one replaces it. Unlike your annual budgeting process, it’s not “one and done” until next year.
The time frame that is used for the forecast is unique to each company and is the combination of how far out the organization wants to look and how frequently it needs to revisit its actuals vs. its projections.
It may be that a 12-month budget cycle works well for your industry. The question the office of finance should be asking the leaders then is “How often should we be updating?” For instance, your industry may move quickly or be highly volatile, making monthly updates the most advantageous. If that’s too much, however, perhaps quarterly is a more reasonable horizon. The answer lies in what is most pragmatic for the organization’s growth and strategic plan.
Commit to Driver-Based Forecasting
Thanks to the frequency of updates, rolling forecasts can give the CFO better insight into the “why” of budget deviations, not just the “what”. To do that, however, it’s important to focus on drivers instead of aggregate revenue.
For instance, because an annual budget is farther looking, it’s difficult to forecast detailed, driver-based elements of the budget. So, while an aggregate sales increase may be to grow sales of a specific product by 10% in a year, it can be difficult to see the details of that growth.
Can you tell, based on rolled-up sales numbers, if more units were sold because of discounts one quarter or if fewer were sold at full price? Knowing the business drivers makes it clearer to the rest of the organization, and especially to leadership, what exactly is going on. That way, adjustments can be made in other parts of the organization – like manufacturing or procurement.
Set Up Forecasting for Analysis, not Ditch Digging
Forecasting and budgets take less time to update when you’re looking at a smaller window of time. As a result, the mechanics of updating budgets can easily overpower the value of having more accurate and timely information.
Automation and collaboration are key elements to implementing a rolling forecast process successfully. To get the most value out of these new forecasts, companies should consider moving to an FP&A platform, such as Planning Maestro, that automates the mechanics like updating actual spend from multiple data sources. The platform used should also allow for collaboration without creating bottlenecks. To realize the power of rolling forecasts, the numbers must be updated frequently. This can’t happen if business leaders are emailing around an Excel spreadsheet.
By moving the heavy lifting to a platform and simplifying access, the finance team can spend more time analyzing forecasts and variances than in tedious spreadsheet merging and data validation. The CFO can walk into a quarterly board review with a highly accurate financial report and all of the answers in hand to the board’s questions.
Centage Corporation’s Planning Maestro is a cloud-native planning & analytics platform that delivers year-round financial intelligence. With Planning Maestro, Centage offers the sophisticated features needed by small and mid-market organizations to integrate budgeting, forecasting, and deep data analysis within one easy-to-use, scalable SaaS solution. For more information on how to modernize your office of finance with intelligent planning, view our product demonstration video, or call 800-366-5111.