Global health emergencies, sweeping monetary stimulus, and hundred-year storms used to happen, well, every 100 years or so.
Not anymore. These “black swan” events are seemingly happening with greater frequency, creating disruption in corporate boardrooms around the world as business leaders scramble to react and adapt.
This “new normal” requires adaptability, which – frankly – the traditional annual budgeting and forecasting process doesn’t provide. A ritual most businesses are familiar with, it has many advantages: business units are able to plan along the same timelines, and corporate functions can set deadlines far in advance, enabling a more predictable budgeting schedule. But as the pace of change and uncertainty ramps up, so does the calls to do things differently.
Enter rolling forecasts.
Rolling vs Traditional Forecasting
The biggest difference between a rolling forecast and traditional, annual forecasting process is that rolling forecasts are updated regularly throughout the year, while annual budgets are done once a year.
If the forecast period is 12 months, instead of counting down until the next year’s budget cycle (as is done traditionally), a rolling forecast adds another month as each month ends.
For example: At the end of January, the forecast would be updated to include January of the next year. Then, February of the next year would be added at the end of February of this year. The point is, there is always a fresh forecast for 12 months into the future, irrespective of the yearly calendar.
Companies that have implemented rolling forecasts report greater agility in responding to exogenous events and assumption changes. Rather than waiting until next year’s forecast cycle to course-correct, leadership can do so monthly.
A frustrating part of the annual budgeting ritual can be how quickly it becomes obsolete, despite the significant effort and time invested by finance and accounting teams – as we learned with the pandemic. (As if oten quipped, ‘the budget is obsolete before the ink dries.’) Moving to a rolling forecast eliminates that frustration.
Ok – you’re sold on the concept of a rolling forecast. Now what?
Start by getting “buy-in” from the C-Suite down to the analyst level. Processes that may have been in place for a decade or more need to change; alignment between all stakeholders is critical to ensure a successful changeover.
Workloads on accounting departments are likely to increase in the short term with a rolling forecast model, but this can be minimized by eliminating processes that are no longer needed. It can be an opportune time, for instance, to re-evaluate how finance teams spend their workdays, and eliminate obsolete and unnecessary work.
Employees across the organization may be resistant to such a dramatic change at first. Understanding the perspectives of all stakeholders ahead of implementation can be critical. They should understand why the organization is moving to a dynamic forecasting model, and why the long-term benefit is worth the upfront effort.
Lastly, some companies find it easier to add a rolling forecast as a complement to their annual budgets. Instead of abandoning their traditional cycle completely they add a streamlined budget review each month that allows for quick changes, making the organization more nimble. Over time, as teams slowly adapt to this monthly pace, leadership can decide if they want to phase out the annual review altogether.
Implications for Capex Planning
Large capital outlays have traditionally been reserved for annual budget reviews, forcing project teams to wait until the appropriate time in the year to make a proposal. By that time, the opportunity they were seeking to exploit may have passed, or the environment may have changed.
To stay competitive, companies on the cutting edge are looking to review Capex proposals throughout the year, allowing those with the most merit to be considered, and funds to be deployed to those that pass strategic and ROI muster – not when the corporate calendar dictates.
In order to pull this off, these companies need a modern-day software solution that ties together portfolio planning, modeling, forecasts, and Capex approval flows. Managing these processes through Excel and email moves too slowly and lacks sufficient data governance. With Finario, for example, the planning process and approval workflows are all connected, allowing your business to pounce on opportunities as they arise.
Moreover, strong data governance is an imperative for companies to successfully switch to rolling forecasting. Without a single source of truth, leaders lose trust in existing processes, and approvals are delayed. Finario’s capital planning system establishes that source of truth by integrating actual payment information from your ERP and other systems, auto-reconciling every change to your capital plan, and capturing up-to-date forecasts between project managers.