Rolling Forecast and Rolling Budget
Rolling Forecasts are a type of forecast that, instead of focusing on the calendar year, always base themselves on a set period going forward, such as 12 or 18 months. Rolling Forecasts are carried out continuously and are a support to the company management, but can also be used to, for example, forecast sales.
A common method of work is to create a budget for the coming year and supplement it by creating forecasts monthly or quarterly. A disadvantage can then be that one does not look further than the end of the budget year. Therefore, many choose to work with Rolling Forecasts to get a better and more continuous understanding of the company's development.
The difference is that instead of having the calendar year as the end date, you look 6, 12, 18, or 24 months ahead every time a new forecast is made. New forecasts are often made monthly or quarterly.
The time period is usually determined based on how fast-moving the market the company operates on is and the internal conditions for producing the Rolling Forecasts.
You can view your Rolling Forecast as a time window that you update monthly or quarterly, instead of annually. As a simple parallel: Do you have a favourite team? Would you want to guess the coming year's results based on the previous year's position or have the opportunity to re-evaluate what you tipped monthly?
In the case that your company wants to work with Rolling Forecasts, consider what business rhythm and periodisation your company needs to adapt to. For instance, it often looks different for a property company compared to a consulting firm.
Rolling Forecasts and Drivers
A Rolling Forecast can be based on historical data to predict future outcomes together with current assessments from the business. This enables organisations to assess future development in a more precise - and above all current - way.
By working with driver-based planning and driver-based forecasts, it is easier to see what is driving the business forward. Instead of working with amounts on various accounts in the revenue forecast, one works instead with, for example, quantity and price.
In the staff forecast, concepts such as salary, absence, and various types of surcharges are used, which automatically places values in the correct accounts in the income statement.
By identifying the most important drivers related to your business or operation, you can, instead of planning and forecasting account-based, get a more operationally close perspective on your business, which helps the business understand the forecasts.
This requires a good understanding of what drives revenue and costs in your company. The need for this understanding often leads to closer collaboration between the finance department and operations.
Tip: Make sure you can see outcomes and forecasts in a rolling line chart at the same time in your tool. It's a good way to see breakpoints in a curve early on.
Benefits of Rolling Forecasts
Rolling Forecasts help you look forward, based on where you are today, and allow you to be more agile in your follow-ups and analyses. Your company will be able to adjust plans and resource allocation based on changes in the economy, industry, or business.
Rolling Forecasts also simplify risk analyses and scenario planning and can sometimes be supplemented with predictive analyses and forecasts.
It becomes easier to explain the "why" to the management team as the insights and proposed actions are based on fresher financial information. This ultimately leads to more well-founded decisions. It also becomes easier to actively manage, and management gets more continuous control.
The forecast should be seen as a change instrument that takes into account both the actual outcome for the past months and the budget for the remaining period. Rolling Forecasts are therefore closely linked to the Rolling Budget and are a basis for or part of it.
With Rolling Budgets, your company has a better picture of the financial situation at any given time. However, the working method assumes that the finance department, together with relevant parts of the organisation, should have time and opportunity to carry out the work and a continuous dialogue with the managers who participate in the budget work.
With a Rolling Budget, the finance department controls the continuous updating of the budget. Therefore, the budget process is sometimes called a continuous budget or dynamic budget. The benefits are increased transparency, flexibility, and it makes planning easier.
The concept of Rolling Forecast/Rolling Budget is supported by the more comprehensive budgeting method Beyond Budgeting and the Beyond Budgeting Institute, which advocates dynamic control.
Disadvantages of an Annual Budget
Criticism of the annual budget often includes:
- That it is difficult to set a budget for a whole year because it is hard to see that far into the future. After the first quarter, the annual budget often becomes outdated and more of a reference point.
- That it can be time-consuming to put together the budget as the work is complex, involves many in the organisation, which takes time from the ongoing work.
- That annual budgets quickly become outdated and do not take into account changes in the external environment.
- That they sometimes have internal political elements and drive suboptimal behaviour with personal incentives.
- That the analysis associated with the annual budget sometimes gets stuck on deviations and does not look at underlying problems.
The Rolling Forecasts replace the more static forecasts associated with annual budgeting and are a change and a change work in itself. Some companies have managed to completely move away from the annual budget, but the most successful have carefully planned the transition and taken it in stages.
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