Rolling Forecast – Why and How?

Increasingly, managers are now looking to change the corporate planning process and replace the traditional annual budget with rolling forecasts, 12, 13 or 15 months ahead. What is the reason for this development?

Every year, most companies spend a lot of time preparing a plan for the next financial year. Such plans become obsolete quickly, due to the fast changing business environment. Still, in order to retain control, management generally continues to use the budget as a benchmark for performance measurement and rewards are often linked to performance against plan. This still reduces the value of the budget since often it rather contains the result of negotiations between managers and subordinates than reflecting the actual opportunities and threats faced by the business.

Rolling forecasts have become more prominent in recent years, often in conjunction with new methods such as Better Budgeting and Beyond Budgeting. A budget may still be prepared, but instead of leaving it unchanged it is regularly revised, typically quarterly, or monthly. The aim of the review is not to change the main objectives for turnover or profit, but to re-evaluate priorities in light of operational developments: Declining margins in the department or product category demands actions to make up the losses elsewhere. When working with rolling forecasts the planning period moves with time instead of ending at the fiscal year-end . Systematic use of rolling forecasts improves the planning process and quality and usefulness of the budget. The annual planning process is replaced by continuous reviews providing an opportunity to adjust the budget to the changing environment. This way the budget becomes a real management instrument that enhances the performance of the business.

It is often middle managers who drive the implementation of rolling forecasts, simply because they normally end up with the bulk of the budgeting work and thus understand what is wrong with the traditional approach. But in order to gain the support of senior management, board and general staff several things must be kept in mind:

• It is important that it is clear from the outset that the purpose of the budget review is not to find justifications for poor performance, but to create a forum to continually seek opportunities for improvement. It is necessary to make a clear distinction between the purpose of the annual budget on one hand and the reviewed rolling forecast on the other.
• It must be made clear, in the case traditional budgeting is still adhered to, that the general objectives set out in the annual budget will not change during budget reviews, but instead the goal is precisely to ensure they will be achieved.
• Key performance measures will need to be reviewed and often changed.
• At the beginning it is important to reach consensus on the appropriate performance measures and explore carefully to what extent key business drivers can replace after the fact measures such as profit or margin.
• Key indicators, such as turnover pr. hour of work, number of customers or orders may be more realistic measures of performance where the result is less dependent on external factors.
• Finally, it is critical that the project management is good, with clear goals and a well organized implementation.

The rolling forecast is a powerful management instrument. The growing popularity of rolling forecasts testifies to that. Based on a carefully crafted action, clearly defined roles and not least providing enough time to ensure the quality of the process it can lead to a great improvement.