In our previous blog post, “What are Rolling Forecasts?” we covered forecasting and rolling forecasts in general. In our second post in this series, we look at the pros and cons of introducing rolling forecasts for your organization.
Why, when and for whom?
Sound business planning is essential for organizations of all sizes. However, opinions differ as to what this should look like today. The use of forecasts has been the standard for economically successful organizations for quite some time now. They usually serve as a budget plan basis as year-end forecasts and are realized either in Excel or more conveniently in modern software solutions for planning, reporting and analysis, which makes the forecasting less cumbersome. Year-end forecasts help to make decisions in order to achieve annual goals. At the same time, however, they are relatively inflexible and due to the time needed for preparation, are based on data which, although still halfway up to date when creating the forecast, are quickly overtaken during the fiscal year. Here, the introduction of rolling forecasts is particularly worthwhile for organizations in industries and markets with high volatility.
Regularly considering new data and factors helps to quickly identify probable deviations from plan and to counteract these by taking appropriate measures. With the introduction of rolling forecasts, you also ensure a look beyond the current fiscal year by continually supplementing and adjusting plans. The approach thus also takes into account the fact that business planning for maximum value creation should be a continuous process. There are two key reasons for this:
- Markets are increasingly volatile due to globalization and the increased internationalization of financial capital. Planning that is not seen as a process but as a static task that has to be brushed off once a year is no longer sufficient.
- Concrete plans are generally all the more valuable the more up to date they are. This also means that new factors are taken into account during the course of the year if necessary, thus preventing plans from deviating so far from reality that they no longer provide any value.
So, rolling forecasts are a great tool, right? There are still a few things to consider. It is possible for rolling forecasts to replace annual forecasts, but in reality, they are more likely to be used as a supplement to existing enterprise performance management tools. One reason for this is that in most cases, plans are still prepared on a fiscal year basis, which has been the standard for a long time. This means that organizations have to keep a focus on their annual financial statements. So, if you also use rolling forecasts, this means additional work, the scope of which needs to be carefully monitored. Therefore, it is also important to include less detailed information and only the most important KPIs in your rolling forecasts. Ideally less detail than in a larger and more complex year-end forecast. The interval and horizon for the rolling forecasts should be carefully planned to avoid unnecessary work and keep the forecasts as accurate as possible.
When do rolling forecasts make sense?
Market volatility is increasing again. Traditionally volatile sectors have been even more unpredictable, but even comparatively stable sectors are showing more volatility, irregularity, and uncertainty. Solid planning is even more important to manage these uncertainties. Rolling forecasts can be an extremely useful tool to help your organization navigate these issues with increased clarity and focus.
The following rule of thumb is a useful guide: The higher the market volatility in a particular industry, the shorter the interval for creating, reviewing, and adjusting rolling forecasts should be. Conversely, if market volatility is low, a longer interval is sufficient.
If you notice that actual and planned data in your organization or department regularly deviate, it is worth considering the introduction of rolling forecasts to better understand and manage the deviations.
In our next article in this series, we will cover what you’ll need to introduce rolling forecasts for your organization.