The Complete Introduction to Better Rolling Forecasts
Most economic and business events are cyclical.
Even the most solid plans change when the economy is volatile. In such times, financial forecasts have to become faster and more flexible-ready. A slow budgeting and forecasting process is no longer enough, which has made it decisively clear that we’re moving towards treating rolling forecasts as the standard.
As the global economy is likely to get plagued by high inflation, slow GDP growth, and rapidly tightening pressure on revenue, FP&A teams can make a difference by tightening up the accuracy of your organization’s rolling forecasts through scenario planning, data validity, and faster reforecasts.
In this article, we cover how FP&A teams can create more accurate and better rolling forecasts.
What is a rolling forecast in finance?
A rolling forecast is a financial planning tool that organizations use to continuously predict their future results for budgets, expenses, and other financial data.
Most rolling financial forecasts are updated on a monthly or quarterly basis, allowing FP&A teams to adapt their financial planning to reflect recent trends.
Rolling forecast budgets make use of:
- Historical data
- Latest market conditions
- Evolving risks
- An up-to-date understanding of opportunities to help companies respond to internal and external events
What makes rolling forecasts a powerful tool for FP&A teams is that they make the planning and budgeting process more dynamic.
Implementing rolling forecasts makes your organization nimbler, allowing you to perform effective business analysis and be better prepared for future roadblocks.
What is the difference between a rolling forecast and a budget?
A budget is an annual plan for the fiscal year based on the past year’s historical data. Finance teams work with individual departments to create a static view of the company’s revenue and project expenses.
A rolling financial forecast, on the other hand, supports continuous planning. However, an important thing to remember is that you cannot abandon your annual budgets altogether. Instead, rolling forecasts can be used as a supplement to your annual budget with a focus on your annual financial statements.
Have a look at the difference between budgets and rolling forecasts.
How is a rolling forecast used?
There’s an increasing expectation from FP&A teams to create rolling forecasts that can provide strategic guidelines.
When should you use rolling forecasts?
When the market gets unpredictable, irregular, and uncertain, rolling financial forecasts are critical to helping your organization navigate these ambiguities with increased clarity and focus.
As a starting point, here’s what you should consider: When the market gets highly volatile in a particular industry, the interval for creating, reviewing, and adjusting the rolling forecast budgets gets shorter.
Alternatively, when the market volatility is low, even longer interval rolling operating forecasts are sufficient.
If you start noticing major deviations in your organization’s planned versus actual data, introducing rolling forecasts can help understand and manage these deviations.
How does a highly accurate rolling forecast impact an organization?
Introducing rolling financial forecasts might seem like a monumental shift for the finance team. What you also need to consider are the benefits of accurate rolling forecasts.
Real and actionable insights
First of all, the rolling forecast gives finance teams real-time, actionable, and strategic insights that guide your business forward. Based on this data, your organization has the agility to reallocate resources based on dynamic conditions.
Makes scenario planning easier
Also, as a financial forecasting tool, rolling forecasts make scenario planning easier. Since the rolling forecast takes into account recent churn, revenue, expense, and other metrics, you can more accurately project what over performing and underperforming looks like and update your scenarios.
React to changes
Companies can leverage rolling forecasts to adjust their approach to meeting goals as new information is gathered throughout the year. Rather than relying on a static budget to make their decisions, stakeholders can react to fluctuations or uncertainties that may be impacting the economy.
Set realistic and attainable goals
A rolling forecast is an ever-evolving plan with regular updates. For organizations, it is an easy way to keep a realistic set of strategic goals. Even when the targets shift along the way, rolling forecasts keep your company moving forward to success.
Steps to create rolling forecasts
Outline your objectives
The framework of your forecasting process depends on the objectives based on which the financial team decides the financial forecast and how the forecast will be used.
Some common objectives are:
- Driving growth
- Reducing costs
- Maximizing customer retention
- Headcount planning and optimization
Goals and objectives will help determine the aspects of the forecast that need the most focus.
Consider the time frame
You should remember that the time horizon is not set in stone and it can change as your company scales.
The three factors to consider when deciding the frequency of your forecasting cycle are:
- Availability of resources
- Pace of growth
- The volatility of your business
Fast-growing businesses may require forecasts on a shorter time horizon: monthly or every 1-2 quarters. Less volatile business can do with quarterly forecasts.
Leverage driver-based forecasting
With a driver-based approach, updates are focussed on the key data that determine the key financial outcomes for your company. You can account for the most important variables that impact finances. This method allows you to forecast finances strategically, making your rolling forecasts more efficient and accurate.
A rolling forecast is only as good as the data that goes into it. To ensure accuracy, your financial team needs updates from managers and contributors throughout the organization. Financial planning software provides access to reports and planning templates for all stakeholders and contributors involved in the process.
At this stage, the FP&A department should identify the value drivers most likely to contribute to achieving success instead of focusing on too many goals.
Align company goals
It is not uncommon for businesses to plan their operations and finances separately from each other. This can lead to disparities in resource allocation.
The most impactful rolling forecasts integrate operational and financial planning, enabling forecasts to represent the entire company.
Gather data from multiple sources, business applications, and data lakes. Financial planning software integrates with your most important data sources to create a foundation of data integrity. The software eliminates the need to manually gather information from every corner of the business.
Find a system that works
Spreadsheet-based rolling forecast process can be tedious and prone to inaccuracy. Instead, an integrated business planning platform offers tools to streamline the forecasting process and improve data analysis. The result would be a rolling forecast budget that has higher precision and efficiency.
How to create more accurate forecasts?
1. Maintain accurate historical data
Clean and accurate data is critical for generating useful and reliable insights. It needs to be collected from a wide range of relevant sources, both internal and external.
We know that the most efficient FP&A functions will be those that can drive real business impact through creative analysis of both historical data and multiple data sets. But organizations struggle to aggregate, format, and harness the power of historical data.
Financial planning software simplifies the data preparation process for financial planning and analysis teams. By automatically importing data from multiple business systems (CRM, ATS, data lakes, spreadsheets, and others) and cleaning it, the FP&A software frees up your headspace to focus on strategic decision-making.
Another reason why FP&A departments prefer software to maintain accurate historical data is that they don’t have to juggle multiple spreadsheets or sort through email threads. Business planning software has powerful collaboration workflows to gather input from colleagues and other departments.
2. Incorporate scenario planning
Let’s start with a question: Is your finance team getting bogged down in complex spreadsheets trying to capture scenario planning opportunities?
If so, most probably, by the time the finance team offers strategic insights, your business would have moved on in the decision-making process.
Flexible scenario planning empowers your finance team to manage volatile environments, plan for the best and worst-case future outcomes, and capture all possibilities for an optimal path forward. Now more than ever, your ability to plan for all circumstances is critical and scenario planning lets you do that.
A next-generation scenario planning feature lets you create and test as many scenarios as you like at the application level. Then, you can run these scenarios to compare your model data simultaneously across several future paths. Scenario planning grabs the best parts of traditional scenario planning, building alternative paths atop a baseline scenario and enhancing it.
Scenario planning on Pigment does the following work for you:
- Rates scenario on any model with a few clicks
- Compares all possible outcomes on a single chart or grid
- Changes data and formulas for any particular scenario
- You can even share scenarios across all applications
3. Use tools that allow flexible reforecasts
To a large extent, technology is changing the way FP&A teams make decisions. The FP&A teams are expected to be able to reforecast in a window of a few days, all while sifting through unprecedented levels of data.
Flexible reforcasting solutions help FP&A professionals deliver deeper insights and stronger financial forecasts to steer the business performance effectively.
The key features of integrated business planning tools that allow flexible reforcasts are:
- Automated data preparation
- Creating unbreakable formulas
- Running comprehensive what-if scenarios in minutes
- Optimizing collaboration with personalized workflows
The agility finance teams gain from these features helps them serve the broader goals of the organization by adapting plans, budgets, and financial forecasts to changing business conditions and industry trends.
An overview of financial forecasting methods
The next step after knowing the importance of rolling financial forecasts is to gain an understanding of financial forecasting methods for a real-time understanding of your company’s financial trajectory and produce predictable results.
The five financial forecasting models for predicting accurate results are:
- Driver-based forecasting
- Predictive and prescriptive forecasting
- Exception-based forecasting
- Moving average forecasting
- Simple and linear regression
Business planning and financial forecasting software Pigment helps you effectively create rolling forecasts and execute them with speed and accuracy along with encouraging collaboration and participation across departments.