According to a study conducted by Adaptive Insights, the leading Cloud CPM solution provider and CMC partner, 64% of annual forecast targets are obsolete after 4 to 6 months. FP&A departments must now take into account substantially more information when forecasting than they once did, with so much readily available thanks to the massive advances in communication technology and Big Data. CFOs must therefore adopt a more proactive stance if they are to mitigate the risks of any shocks that could have an impact on their firm’s bottom line.
In order to do this, many CFOs are moving away from the idea of a regimented quarterly or yearly forecast and implementing rolling forecasts. A recent study, conducted by AFP, revealed that 44% of finance professionals have turned to continuous forms of planning, as old methods become less and less viable.
A well-prepared forecast provides an excellent decision-making framework for management, and acknowledges the issues of predicting what the business environment will be one year from now. It allows for adjustments to an existing forecast that integrates new information as to the company’s economic environment, such as product costs, sales per day, and shipping costs. It comes with a number of benefits that greatly improve a company’s ability to cope with any shocks.
It offers the kind of flexibility that cannot be achieved by regimented forecasting. By using rolling forecasts, managers are able to concentrate on the medium-term outlook, and act to close gaps against benchmarks as they arise, as opposed to a target set earlier in the year that is potentially outdated.
Avoid Shock Profit Warnings
Shock profit warnings are a board of directors’ worst nightmare. One only has to look at what happened at Tesco to see the damage that they can cause. Rolling forecasts enable information to be rapidly consolidated throughout the group, and any sharp changes in performance can be anticipated and action taken to lessen the blow, particularly to the share price.
Improve Spending Decisions
Managers who have money left in their budgets at the end of the year will often spend the money purely because it is there. For example, in the NHS, if the budget is not spent then the next year it is cut, so at the end of every financial year various departments will stock pile IT equipment to ensure that their budget remains the same. This is an extreme example, and perhaps equally as indicative of government mismanagement as it is the fallibility of traditional forecasting and budgets. A rolling budget views the budget as a guide, and allows for funds to be provided when needed.
Faster Response Time
Should a company see a sudden surge, or decline, in demand for a product mid-year, a rolling forecast means they can reallocate funds from the segments of his business not performing as well to those that are.