At Carlson Management Consulting, one of best practice mindsets that we instill with our clients is that your plans should always be up to date. According to a study by our partner Adaptive Insights, the leading Business Planning Cloud solution, 64% of annual forecasts are obsolete after 4 to 6 months. In our experience with new clients, we have found that most of their forecasts are already out of date by the time they are approved. If this is an issue with your company, there is an easy way to achieve the goal of accurate forecasts. The solution is to implement a rolling forecast process, which is achievable with the right technology. There are several reasons why you should implement rolling forecasts rather than relying only on the traditional annual forecast. With a rolling forecast, you can:
- Identify opportunities and risks in a dynamic business environment
- Perform driver-based planning and "what if" scenario analysis
- Have the flexibility to redirect resources and priorities to better align with strategy
- Create a culture that improves collaboration between finance and sales
The rolling forecast allows the FP&A team to identify opportunities and risks that lead to or diminish company success. You will be able to better feel the company's pulse and make more timely decisions that ensure the company is achieving milestones according to plan. When you find a variance, you can determine the fundamental cause and make necessary changes.
To implement an efficient rolling forecast process, you need to pinpoint the important variables that drive your business and the timing of their impact on operations. Does your highest revenue-generating product have a raw material whose cost is sensitive to volatile commodity prices? You will want to include that material cost as a driver. To visualize the future impact on COGS and margin, you can then create "what if" scenarios projecting multiple cost points of that material. While you may want to go into great detail with drivers, focus on the main drivers to make the rolling forecast more manageable.
What are the other crucial components of rolling forecasts? You should frequently import actuals into your model to analyze the variance to plan and ensure you are headed in the right direction. This emphasizes the importance of having a budgeting and forecasting system that integrates with the repository of the actuals data (i.e., the ERP system). By integrating actuals with forecast, you will identify issues early on that will allow you to adjust your priorities and resources as needed.
While more frequent forecasts may seem to consume more time and resources, they actually save time in the overall planning process. A more efficient and automated rolling forecast empowers the finance team to prioritize value-added analysis and decision-making. By course-correcting as necessary, your company will be more proactive and flexible when aligning finance and operations with strategy.
What additional factors should you consider when implementing rolling forecasts? As a budget owner, you should engage more stakeholders in the process. You need to provide objective data that feeds the forecast. By including stakeholders, you will help individual budget owners to achieve their goals. Communicate the updated projections, and strategy, to the entire organization so everyone is working from the same "sheet of music".
According to another study by the same company, the following statistics provide a look into the frequency of forecasting:
Your specific market's dynamism, business's drivers, and ability to readily incorporate actuals into the forecast, shape the forecast's frequency. While all companies vary, if your company is doing bi-annual or annual forecasting, you should seriously consider the benefits of moving to a more frequent, if not continuous, rolling forecast.
Because implementing a rolling forecast process requires careful planning and implementation, approach it in a deliberate manner. Introduce it to more strategic areas of the business first and then put it into action more widely as the value of improved insight and decision-making is recognized.
Want more helpful insights on rolling forecasts? Get your free copy of the 5 Steps to Getting Your Business Onboard with Rolling Forecasts eBook.