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How Often Should You Be Forecasting?

The method that’s right for you may not be what you think

15Sep
FP&A experts from Dropbox, Yahoo, Prezi & Dropbox will discuss forecasting in times of rapid growth at the FP&A Innovation Summit in San Diego on February 14 & 15. View the agenda.

One of the most important questions finance leaders have to ask themselves is how often should they be forecasting? And how detailed should the forecasts be?

There are several ways to approach forecasting. Rolling forecasts, a quarterly deep dive forecast, or a quarterly high level forecast with one deep dive forecast during the year are probably the most popular. It really depends on the nature of your organization as to which works best, but each has their pros and cons, and it is important to understand that, while something like a rolling forecast may sound like the obvious option, it is not necessarily so.

A rolling forecast is something that has only become popular in recent years, enabled by advances in analytics and reporting technology. An AFP study recently revealed that 44% of finance professionals have turned to continuous forms of planning, as old methods become increasingly less viable. The advantages are clear, with frequent assessment allowing decision makers to incorporate changes in business conditions as they occur, increasing agility by anticipating short-term outcomes and therefore having the ability to influence them. With a rolling forecast, executives can make decisions that reflect any changes and trends in their industry or business, manage cash flows to anticipate risks, and set shareholder expectations according to the most recent possible projections.

Asoka Karandawala, an independent finance director at AKCA Consulting in London, argues that constantly having figures to show the C-suite is the main benefit, noting: ‘For one thing, you always have a set of figures that you can show your board [and] your senior people. And if you ever want to get some funding from outside to expand your business or buy some equipment, the bank will usually say, 'Give us a forecast for your next 12 months and your cash flow. With a rolling forecast, you have a foundation to pull these figures from.’

The obvious problem with implementing rolling forecast is the time and resources they consume. In a rolling forecast, you have to be constantly doing the figures, occupying a significant portion of your finance team's time. Budgets and forecasts also can’t run a business, they are just tools to support decision-making. Managers are liable to spend all of their time preparing forecasts and not enough completing other necessary tasks, foregoing the strategic, creative role within their organization that they likely want to be filling.

Nothing about your business remains constant. Information that is fluctuating - such as the price of oil, which could well double between quarterly forecasts - can have a tremendous impact on the majority of businesses. Logic would, therefore, suggest that your forecast shouldn’t stand still either. Basing all of your decisions on an annual budget means you're operating on static assumptions that quickly become irrelevant. According to a study conducted by Adaptive Insights and CMC partner, 64% of annual forecast targets are obsolete after 4 to 6 months. 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. Ultimately, though, it depends on the organization. A small business is unlikely to have the resources to carry out rolling forecasts. For those, it is more important to simply manage cash flow appropriately to deal with any shocks, and not spend time and resources that could be better spent elsewhere.

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