The Business Mandate for a Rolling Forecast

by Scott Stern

Why it's time to ditch your static budgets.

© sutlafk/iStock/Getty Images Plus

Today’s competitive business environment requires finance leaders to play a strategic role in planning and forecasting. In fact, modern CFOs and their teams are now expected to keep a pulse on all aspects of the organization, including financial and operational performance, in near real-time. To support this, many organizations are implementing agile budgeting, planning and forecasting processes that enable tighter collaboration and effective decision-making across the enterprise. This means maintaining a strong link between finance and sales, operations, HR, IT and other functions. Central to this is a shift to rolling forecasting processes that enable organizations to continuously plan and forecast. 

Rolling forecasts go beyond historical one-time planning events like the Annual Operating Plan (AOP) to provide an ongoing (e.g. rolling) view of the business. This approach factors in an updated view of financial and operating results, and gives executives and managers the opportunity to continuously plan for future periods based on real-time business insights. 

Given the volatility of global markets today, we are in a challenging environment for planning and forecasting. On one hand there are fears of the next recession, the impacts of the US-China trade war and uncertainty surrounding Brexit. On the other, we are seeing positive corporate earnings and reports suggesting consumer health is stable. 

Having a clearer view of your own organization’s business results helps reconcile and guard against conflicting market data and constant chaos.

Especially now, at the end of the year, finance and business leaders are setting goals and finalizing plans for 2020. Traditionally, this means hours and hours of developing revenue and EBITDA targets to support the annual plan and align sales, workforce, production and capital plans. But what happens if the annual plan is off?  

Rolling forecasts can break that cycle and provide better, more dynamic process for planning throughout the year. 

Ditch Your Static Budgets 

While AOPs are the norm for most organizations to set expectations and anchor compensation targets, such plans do very little to help manage a sophisticated, global organization. Sadly, most AOPs are already out of date within seconds of the final submission and only get worse over time.

Rolling forecasts stay current and allow your organization to respond quickly to new opportunities and risks. This can include changing customer or market demand, for example, and external pressures such as changing oil or commodity prices, and interest rates. 

A rolling forecast (see figure 1) is designed to allow management to continuously plan the business. According to The Dresner Advisory 2019 Wisdom of Crowds EPM Market Study:

  • 62% of organizations are using some form of a rolling forecast
  • 14% use a rolling forecast instead of an annual plan
  • 35% complete rolling forecast monthly
  • 21% complete a rolling forecast quarterly

One best practice is to ensure rolling forecasts extend beyond the current calendar or fiscal year, anywhere from 12 to 24 months into the future. In addition to providing more frequent forecasting throughout the year, the rolling model pushes the finance team and business leadership to think more strategically. Done consistently, a rolling forecast process can both eliminate the need for an annual budget and positively affect the ongoing vision, creating a new planning DNA across the organization.

Focus on the Business Drivers and KPIs

According to Ventana Research’s “Let’s Talk About the Business Not Just the Budget,” 50% of finance leaders report they get little value out of their financial planning processes. That’s in large part because static financial plans completed in isolation add little value to line managers and don’t drive the business.

To add value and relevance, financial planning needs to factor in business drivers such as customer wins or losses, market demand, global competition, inventory levels as well as marketing and supply chain plans.       

Rolling forecasting is NOT only about finance, revenues and expenses. It’s about unleashing value across the organization and driving measurable business performance. To do that, your organization should focus on what actually drives the business. That includes creating processes to help translate how changes in the business impact the P&L, balance sheet and cash flow. A driver-based rolling forecast process ensures agility, collaboration, alignment and a focus on what drives the organization.

Align Detailed Operating Plans with Financial Plans and Results

To be successful with driver-based rolling forecasts, organizations ideally need a purpose-built software solution that integrates actual financial and operating results, plans and forecasts into a single platform that supports enterprise-wide collaboration. Then managers performing rolling forecasts can then easily tap into all the financial and operational data required to create a current, up-to-date plan. This enables detailed, driver-based rolling forecasts at the customer level, project level or person level and allows you to dynamically understand the impact to the P&L, balance sheet and cash flow. It’s even possible to do this for multiple scenarios, in real-time, without creating a series of off-line spreadsheets or moving data between “connected” software modules.

Rolling Forecasting in Action

Many organizations are reaping the benefits of moving to rolling forecasts.  One example is Dril-Quip, a leading manufacturer of offshore drilling and production equipment for use in deepwater applications. To align financial results with operational plans, Dril-Quip developed an 18-month rolling forecast process to capture key drivers of the business from each of the world-wide sales, operations and HR leaders – creating a true integrated planning environment. In addition to providing more forward-looking visibility, the use of an 18-month rolling forecast enabled the company to move its annual budget process and Board of Directors approval into the 4th Quarter.

The business landscape is only becoming more dynamic and more competitive. The finance team can play a highly strategic role in helping your organization stay agile and respond effectively to business opportunities and challenges as they emerge. That starts with a shift from a static business view to continuously current data. It starts with a rolling forecasting process.

Scott Stern is the Director of Product Marketing at OneStream.