The world is a volatile place, and financial forecasting will never be able to predict the future with 100% accuracy. However, making the shift to rolling forecasts can dramatically improve the odds. According to a study by Adaptive Insights, the leading Cloud CPM solution provider and CMC partner, 64% of annual forecast targets are obsolete after 4 to 6 months. Rolling forecasts are constantly updated with new information to ensure that this does not happen, and decision makers are therefore better able to anticipate short-term outcomes and influence them.
Many organizations are now realizing these benefits and implementing rolling forecasts. In a recent survey by Aberdeen Group, 71% of top-performing organizations who responded said that they mitigated against risks related to volatile business conditions by continuously updating forecasts to better reflect current business conditions. While the resources of large organizations make them far more capable of enacting such changes, improvements to technology has opened up the field for smaller companies to do the same.
All businesses are different, with different cycles and different rhythms. Therefore, how often forecasts should be updated varies from industry to industry. Retail, for example, will have a short cycle, while oil and gas will have a longer cycle. There are four constants to every industry that must be considered though:
Rolling forecasts require a system that can provide the necessary functionality to accommodate a number of things, including your budget, planning, strategic management, forecasting, and measurement needs. Excel is not this system, as it only caters for single forecasts, while the system for rolling forecasts require additional analysis/versions. Rolling forecasts must also be linked to operational data sources, so that data can be pulled through easily with human error in the data entry stage.
Rolling forecasts do not require anything like the same level of detail as annual forecasts, and should only focus on a few key drivers. This also substantially reduces the workload, the precious man hours that SMEs and startups cannot afford to waste. Rolling forecasts should not bother trying to analyze every metric, as many largely remain the same. Sales and costs should be the primary focus.
Select The Forecast Horizon That Fits Your Organization
Rolling forecasts should look at a period long enough to give leaders time to effectively steer the business. Annual forecasts should be looking 3 years ahead, at a minimum, while rolling forecasts only need to to cover a year in advance. Such a model enables assessment of current realities that will influence longer-range projections, and also detailed operational plans.
Put Them Into Practise
It’s also important to remember that forecasts are not purely there to provide an accurate view of the future, they’re there to offer insights about how strategic options and future events will combine to produce the financial outcomes. The important thing is to remember that you need to be setting the appropriate strategies, and taking action to influence the outcomes. Everyone in the company needs to be working towards these goals, and visibility of the forecasts is paramount in providing everything.
Don’t Take Them As Gospel
It is a mistake to assume that rolling forecasts will automatically be right purely because you’re making more of them. The only certainty about a forecast is that it will be wrong. The only question is by how much. Always be aware that surprises can happen, and ensure the data is perfect.