A study by Adaptive Insights, the leading Cloud corporate performance management solution provider and Carlson Management Consulting partner, shows that 64% of annual forecast targets are obsolete after 4 to 6 months. Indeed, in our experience with clients, we have found that most of their forecasts are already out of date by the time they are completed. This is a surprising finding that has serious implications for most businesses. At Carlson, one of our guiding principles is that your plans should NEVER be out of date. Easier said than done, you may be thinking. Well, in our more than 100 years combined financial planning and analysis experience, this is achievable when you implement rolling forecasts. There are several reasons to implement rolling forecasts rather than relying solely on the traditional annual forecast. A rolling forecast:
- identifies opportunities and risks in a dynamic business environment
- enables driver-based planning and "what if" scenario analysis
- provides the flexibility to redirect resources and priorities to better align with strategy
- facilitates a culture of inclusion and empowerment
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The rolling forecast allows finance professionals to identify opportunities and risks that contribute to or imperil success. It allows you to better monitor the pulse of the company so that more timely decisions can be made to ensure the company is moving forward according to plan. When a variance is found, you can then drill down to determine the underlying cause and make the appropriate adjustments.
In order to develop an efficient rolling forecast process, you need to identify the key variables that drive your business and the timing of their impact on operations. If your highest revenue-generating product includes a raw material whose cost is sensitive to volatile commodity prices, you will want to include that material cost as a driver. You can then create "what if" scenarios projecting multiple cost points of that material to envision the future impact on COGS and margin. While there is a tendency to go into great detail with drivers, be sure to focus on the main drivers to make the rolling forecast manageable.
Another component of rolling forecasts is that you should frequently import actuals into your model for variance analysis and to ensure you are on track. This underscores the importance of having a budgeting and forecasting system that integrates with the repository of the actuals data (e.g., an ERP system). By integrating actuals with forecast, you will identify issues early on which will allow you to refocus your priorities and resources as necessary.
While it would seem that more frequent forecasts would consume additional time and resources , they actually save time in the overall planning process. A more efficient and automated rolling forecast enables the finance organization to focus on more value-added analysis and decision-making. The ability to course-correct as necessary allows your company to be more pro-active and flexible in aligning operations to strategy.
Finally, an important consideration when implementing rolling forecasts is to engage more stakeholders in the process. Budget owners need to participate and provide the objective data that feeds the forecast. By being inclusive, you will cultivate a feeling of empowerment that individual budget owners can effect positive change. It is vital to then communicate the updated projections (and strategy) to the broader organization so that everyone is working from the same "sheet of music".
Another study by the same company provides the following statistics when it comes to the frequency of forecasting:
The frequency of the forecast is defined primarily by the dynamism of your particular market, the drivers of your business, and your ability to readily incorporate actuals into the forecast. While all companies are different, if your company is doing bi-annual or annual forecasting, you should seriously consider the benefits of moving to a more frequent rolling forecast.
Implementing a rolling forecast process requires careful planning and execution and should not be approached casually. It should be phased into strategic areas of the business first and then deployed more broadly as the value of improved insight and decision-making is realized.