In today’s fast-paced business environment, predicting the future is not only a challenge but a necessity. Traditional annual budgets are often too rigid, and by the time they are finalised, they can already be outdated. To address this issue, many businesses are adopting rolling forecasts, a powerful tool that enhances financial planning, improves decision-making, and provides a more dynamic approach to long-term business strategy.
If you’re looking to improve your financial planning process, rolling forecasts could be precisely what you need. In this blog, we’ll walk you through what rolling forecasts are, why they are essential for long-term financial planning, and how to implement them in your organisation effectively.
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What is a Rolling Forecast?
A rolling forecast is a continuous, updated financial forecast that looks ahead for a set period, typically 12 to 18 months. Unlike traditional annual budgeting, which is set once a year and can become outdated quickly, a rolling forecast is regularly updated to reflect new data, market changes, and business developments.
Key Features of Rolling Forecasts:
- Dynamic and Real-Time: As the forecast is updated regularly (monthly, quarterly), it stays relevant and reflects real-time business conditions.
- Forward-Looking: Instead of predicting the past year’s numbers, rolling forecasts look into the future, providing more actionable insights.
- Continuous Planning: A rolling forecast offers a constant planning cycle, allowing businesses to adjust course when needed.
This flexibility enables businesses to adapt to market shifts, economic changes, or even internal developments. It’s a more proactive approach to financial management than traditional static budgets, which are often left untouched for an entire fiscal year.
Why Rolling Forecasts Are Crucial for Long-Term Financial Planning
1. Adaptability to Market Changes
The world of business is anything but static. Markets fluctuate, regulations change, and consumer behaviour evolves. A static annual budget cannot account for the frequent changes in a dynamic business environment.
With rolling forecasts, businesses can anticipate changes and adjust their financial outlook as circumstances change. For instance, if there is an unexpected increase in material costs, a rolling forecast will allow a business to adapt its expenses and sales projections accordingly without waiting until the next budget cycle.
2. Better Decision-Making
Rolling forecasts provide companies with a clearer understanding of their future cash flow, expenses, and revenue projections. By having a more accurate view of the financial future, companies can make better, more informed decisions.
- Operational Decisions: Businesses can plan for hiring needs, product launches, or investment opportunities based on up-to-date financial data.
- Strategic Decisions: With more accurate and timely data, companies can make informed strategic decisions, such as expanding into new markets or scaling operations.
In short, rolling forecasts allow decision-makers to react to changes swiftly and with greater confidence.
3. Focus on Strategy Rather Than Reaction
With traditional budgeting, many businesses focus on trying to meet a fixed target set at the start of the year. It can often lead to reactive decision-making, where business leaders are caught off guard by unforeseen circumstances.
Rolling forecasts, on the other hand, help companies stay focused on long-term goals and strategy. Since the forecast is regularly updated, it allows for a more proactive approach to financial management, ensuring that short-term adjustments do not divert the company from its larger strategic objectives.
Key Components of a Rolling Forecast
To fully leverage the potential of rolling forecasts, businesses need to understand their core components. Here are the key elements that should be part of a rolling forecast:
1. Time Horizon
The time horizon for a rolling forecast is typically 12-18 months. However, some businesses may choose a longer or shorter period depending on their specific needs. Unlike traditional annual forecasts, rolling forecasts are updated periodically, usually monthly or quarterly, to provide an ongoing view of future performance.
For example, a business may start the year with a rolling forecast that covers the next 12 months. After the first month, the forecast is updated to cover the following 12 months, ensuring that it always looks ahead for a consistent period.
2. Data Inputs
Accurate data is the backbone of a reliable rolling forecast. To ensure the forecast is valuable and actionable, businesses need to feed it with the correct data. Key data inputs include:
- Historical Performance: Past financial data, such as revenue, expenses, and profits, provides a baseline for future forecasts.
- Market Trends: Insights into industry trends, economic forecasts, and competitor performance can help predict future outcomes.
- Operational Data: Sales projections, inventory levels, production costs, and staffing requirements all need to be factored into the forecast.
3. Metrics & KPIs
To track progress and performance, businesses should include key performance indicators (KPIs) in their rolling forecasts. These KPIs will depend on the type of business, but can include:
- Revenue Growth: Forecasting future sales and revenue to identify growth opportunities.
- Operating Expenses: Tracking costs such as labour, materials, and overhead.
- Cash Flow: Monitoring inflows and outflows to ensure the company maintains adequate liquidity.
- Profit Margins: Understanding profit margins helps ensure that the company stays financially healthy.
Best Practices for Implementing Rolling Forecasts
Adopting rolling forecasts can seem daunting, but with the right approach, any business can seamlessly integrate them into its financial planning processes. Here are some best practices for successful implementation:
1. Start with a Clear Goal
Before diving into rolling forecasts, it’s essential to define your financial objectives clearly. Are you aiming to improve cash flow? Or are you looking to predict revenue growth better?
By setting clear goals, you can tailor your rolling forecast to track the right metrics and provide actionable insights for decision-making.
2. Use Technology
Creating and updating rolling forecasts manually can be time-consuming and prone to error. Fortunately, there are various financial planning tools and software (like ProForecast) that can automate much of the forecasting process. These tools can integrate with accounting systems, provide real-time data, and even use AI to predict future outcomes based on historical data.
Using Technology ensures greater accuracy and saves time, allowing finance teams to focus on strategic planning rather than administrative tasks.
3. Collaborate Across Departments
Rolling forecasts are most effective when different departments are involved in the process. Collaboration between finance, sales, marketing, operations, and HR teams ensures that the forecast is comprehensive and reflects all aspects of the business.
For instance, sales teams can provide input on projected sales numbers. In contrast, HR can provide data on hiring needs—this collective approach results in a more accurate and well-rounded forecast.
4. Regular Reviews and Adjustments
One of the most significant advantages of rolling forecasts is their dynamic nature. However, this means that regular reviews are essential to maintain accuracy. Businesses should review and update their forecasts regularly—whether monthly, quarterly, or even bi-weekly—to reflect any changes in business conditions or market dynamics.
These updates will keep the forecast aligned with actual performance, ensuring it remains relevant and actionable.
Common Mistakes to Avoid When Using Rolling Forecasts
Rolling forecasts are incredibly valuable, but businesses must avoid certain pitfalls to ensure they are effective. Here are some common mistakes to watch out for:
1. Overly Complex Models
While it’s essential to be thorough, creating an overly complex rolling forecast can make it challenging to manage and understand. Aim to develop forecasts that are detailed enough to be useful but simple enough to be actionable.
2. Neglecting External Factors
A rolling forecast should account for both internal and external factors that could impact the business. Neglecting to include factors such as market trends, economic shifts, or regulatory changes can lead to inaccurate predictions.
3. Inconsistent Updates
One of the key benefits of rolling forecasts is their ability to adapt to changing conditions. However, if updates aren’t done regularly, the forecast becomes outdated and loses its value. Set a clear schedule for reviewing and updating the forecast to maintain its accuracy.
Real-World Example of Rolling Forecasts in Action
Let’s take a look at a real-world example to see how rolling forecasts can benefit a business.
Case Study: A Manufacturing Company
A mid-sized manufacturing company found that its annual budget often became irrelevant by mid-year. Changes in raw material costs, demand fluctuations, and unexpected equipment downtime made the initial forecast obsolete. The company decided to implement rolling forecasts to address this challenge.
By updating the forecast monthly, the company was able to adjust its revenue projections, operational costs, and capital expenditures based on real-time data. As a result, the company experienced better cash flow management, more accurate production planning, and improved decision-making regarding capital investments.
How ProForecast Can Help with Rolling Forecasts
ProForecast is a comprehensive financial forecasting software that makes creating and managing rolling forecasts easier and more effective. With ProForecast, you can:
- Automate Forecasting: ProForecast simplifies the process by automatically updating your rolling forecast with real-time data.
- AI-Powered Insights: Use advanced AI to predict future outcomes based on historical data and market trends.
- Collaborative Tools: Share models and collaborate across departments to ensure your forecast is accurate and aligned with company-wide goals.
To learn how ProForecast can enhance your rolling forecasts, schedule a demo today.
Conclusion
Rolling forecasts provide businesses with the flexibility and foresight needed to navigate an unpredictable market. By continuously updating financial projections, companies can make better decisions, remain agile, and stay on track to achieve long-term goals.
If you want to ensure that your financial planning process remains dynamic and accurate, adopting rolling forecasts is a step in the right direction. With the right tools, like ProForecast, and a solid strategy, you can make rolling forecasts a cornerstone of your financial planning for years to come.
