24 Sep

The Advantages Of Rolling Forecasts

First, a recap of the messages from the last three blog posts. What we’re saying is that budgeting is important, but to make it truly valuable so that it gets buy-in rather than indifference, it’s crucial that everybody can see that the budget has a direct link to the company’s strategy and that it fits in with its culture. The whole team will then be much more motivated to do their best to produce a budget more quickly and more reliably.

But what is the best type of configuration for a budget? One of the major problems of the traditional budget, and a basic reason why budgets are often disparaged, is that the whole focus seems to be on the 12 months that make up the financial year but of course this is an artificial construct in the first place. It may be convenient block of time for the finance department, but the financial year-end date may be completely irrelevant in the context of project timelines, sales seasonality, capital expenditure and other such factors. Other grudges often cited about budgets include demands for far too much detail and excel templates that are too inflexible.

The value of ‘rolling forecasts’

The volatility and uncertainty in the markets, compounded by an increasing speed of change, means that most companies need to update their forecasts and budgets on a very regular basis. Many companies have adopted a policy of rolling forecasts that are updated either monthly or quarterly.

In terms of configuration, forecasts that always look 15 months ahead are very popular. At the end of every month or quarter, having reviewed the latest2 actual results, a further month or quarter is added on to the end of the current forecast. The entire 15-month forecast is updated in the light of the actual results and trends. This provides what is effectively a refreshed budget on a continual basis, and it avoids the restraints of the classic straightjacket budget.

What does this mean in reality for the small business? It does mean of course that managers need to have accurate and up-to-date information, e.g. sales data on a weekly or even daily basis, and frequent feedback from managers and staff on what’s happening in the market and how it may affect your future sales and your cost costs and overheads, and of course you need up-to-date cash flow data.

For rolling forecasts to work the budgeting and forecasting process itself needs to be streamlined, e.g. with good employee training and guidance, and the sort of budgeting templates that don’t demand unnecessary detail.

Variance reports are critical to explain differences from expected outturns and negative variances should not be used to ‘punish’ responsible managers but to enable the company to learn. A monthly meeting is used to ensure that everyone involved gets the right feedback on results and that variances are analysed in relation to strategy – do tactics, margins, etc need any adjustment?

The lessons learnt are then applied in updating the rolling forecast.