Rolling forecasts are a specific type of financial forecasting that use existing data to help predict aspects of business performance throughout the year. In this blog post, we explain what’s unique about this type of forecasting, how it works and why more and more companies are opting for rolling forecasts. It is the first post in our series on this topic.
Need a general overview or refresher? In the first section, we’ll explain some of the more general aspects of forecasting. Ready to dig deeper into the details? Jump to the second section, where we dive straight into specifics of rolling forecasts.
Overview of forecasting
Forecasts are a key tool used in finance and common in medium-sized and large companies in which many departments and/or branches are networked, hence maintaining a certain level of complexity. The purpose of forecasting is to identify expected deviations from the plan at an early stage so that the organization can react accordingly – for example by adjusting the budget. When and how often forecasting is carried out, and what data is used for it, varies from organization to organization. Similarities can be found within specific industries or markets. Forecasts can be made both regularly and irregularly – i.e. “ad-hoc.” It is important to note that forecasts are not to be used as a prediction tool, but rather as an indication of necessary changes to achieve operational and strategic goals.
For this purpose, forecasts can be created in different departments of the business, for example as sales or financial forecasts, as well as based on different underlying values. Plan values can be compared with forecast values or actual values with forecast values as a basis for comparison.
For the forecast itself, you can include different types of data. Certain value drivers, such as prices or quantities, can be considered as well as non-financial data (e.g. effects of new competitors on the market). In general, however, it is recommended to keep the various datasets for the forecast precise but manageable, in order to reduce the effort and expense involved, and at the same time optimize your use of the tool.
The key element to all forecasts is that they are created for a specified period of time. The time period used depends on the industry and the current or standard market volatility in that industry.
Rolling forecasts as a tool for finance
Rolling forecasts are used periodically throughout the fiscal year and either serve as a supplement to the fiscal year forecast, budget and other plans or completely replace the annual forecast. For rolling forecasts, an interval is defined at which you create and review forecasts. Since there isn’t a universally standard interval, it must be evaluated individually for each organization.
The graphic above shows an example of a quarterly interval with a forecasting horizon of 12 months. However, a weekly or monthly interval is equally possible – the same applies to the forecast horizon. Figuratively speaking, this is the size of the “roll” moving ahead, which always remains the same, because with each interval a new forecast is added to the back of the existing 12-month forecast, or the existing 12-month forecast is extended.
It is important to note that forecasting is more accurate, but at the same time increasingly time-consuming. The more often it takes place (the interval) and becomes less precise, the broader the forecast horizon. However, since we understand forecasts as a tool for finance, a higher degree of inaccuracy can be counterproductive.
Rolling forecasts are useful as a management tool because, unlike annual plans, you always look at the same time horizon (e.g. 12 months) – regardless of the current fiscal year. Thus the problem of traditional plans, where only a few months or even just one month of planning data is available towards the end of the year, is zeroed out. In addition, forecast values are more up-to-date and more useful for making informed decisions and keeping your organization on track to support better insight and better decisions.
In the next article in our series on rolling forecasts, we will discuss when it makes sense to integrate them into your planning processes and where it can be the most useful to implement them.