What Is A 12 Month Rolling Forecast?

If you’re on the fence about whether or not it’s worth switching from a static budget to the more flexible rolling forecast approach, don’t be. When preparing annual budgets, large businesses often need to consider a number of variables that keep on changing from day to day or month to month. For example, the implementation of a government policy that directly affects the business will require the company to adjust its financials to accommodate and reflect the changes. The data that the company relies on when creating the rolling forecasts should be reliable and credible to give objective targets. Management must verify that the quality of data is above par and that the source of the data is trustworthy. The length of the forecast period may partially determine how much detail should be included in the forecast.

• Want to learn a better way to forecast that doesn’t feel like a hurricane of chaos?
• Jedox simplifies planning, analysis, and reporting with one unified and cloud-based software suite.
• Forecast accuracy decreases when performance rewards are tied to the outcomes.
• Businesses operate in an ever-changing environment, which translates to increased risks.
• For investor updates, you’ll be able to explain the “why” behind all your metrics since you’re reviewing and updating them on a more regular basis.
• Fortunately, there are tools to help automate your processes, such as Hyperion Planning and Oracle Planning and Budgeting Cloud Service .

This helps companies more-reliably project future outcomes based on year-to-date results and actuals in relation to the original budget and previous forecasts. But the real focus is on getting the next quarter or two right and understanding that subsequent quarters come with the same uncertainty they always did. Like many FP&A professionals, you probably have a love-hate relationship with forecasting. Creating responsive and dynamic plans, budgets, and forecasts is difficult with manual, spreadsheet-based tools. On top of that, making any changes to your financial planning approach means you’re changing systems and processes which takes time. However, the initial time you spend to set up your rolling forecast will be well worth it long term. With a rolling forecast, by the time March came around the hotel could update their projections based on the current business conditions.

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Instead, you’re making decisions throughout the year for a set time span. There’s no countdown and you’re always looking ahead, able to make tweaks to your budget as predictions change. To increase agility, many companies are adopting methodologies like zero-based budgeting and rolling forecasts.

No matter how solid your plan felt going into the year, it almost certainly went out the window when the pandemic hit. We can hope that this kind of unexpected event is a once-in-a-lifetime occurrence, but the problem of inflexibility in annual planning remains. It doesn’t help that, once planning is done, most C-suite executives put the budget in a virtual drawer until the end of the quarter, or worse, the next budgeting cycle. A notable exception is the finance department, and that puts the CFO at odds with peers. Mike Tyson famously said, “Everybody has a plan until they get punched in the mouth.” The pandemic has been a solid uppercut worthy of Mike himself.

It is no longer enough to install basic financial systems and employ someone to maintain them. Let me reel you back in with a baseball — and Brad Pitt — example. Moneyball, the 2003 bestselling book by Michael Lewis and then 2011 film adaptation starring Pitt, details the Oakland Athletics’ adoption of sabermetrics. The book and film detail how Oakland Athletics GM Billy Beane, in an effort to build a competitive baseball team on a limited budget, rethought how to assess player value. Simply taking the process you’ve used for annual forecasting and trying to do it over and over, faster and faster, won’t be popular with anyone. Here’s why this more iterative planning style allows companies to react more quickly to both opportunities and disruptions, plus tips on how to get started. Watch Now Tired of comparing your actuals to an outdated budget?

Key Financial Forecasting Methods Explained

By utilizing the eight steps below, companies can build rolling forecasts more effectively. It isn’t that budgets have become irrelevant; quite the contrary. Budgets still play a key role in transposing a strategic outlook into a financial one. They are critical for demonstrating what resources must be deployed and when to make the strategic vision a reality. They are helpful in tracking how actual performance compares to the strategic financial plan. Except that businesses — and on a more granular level, finance departments — don’t exist in a vacuum. A budget, and subsequent forecasts, are formulated based on a set of assumptions that are generally reflective of past operating conditions plus some educated guesses about the future.

Fundamentally changing the expected output of that structure and how employees interact with the forecast is a steep challenge. Prior-period forecasts should always be compared against actual results over time. Drivers can be seen as the “joints” in a forecast — they allow it to flex and move as new conditions and restraints are introduced. In addition, driver-based forecasting may require fewer inputs than traditional forecasting and can help to automate and shorten planning cycles. Along with a variety of financial modeling best practices, drivers should be leveraged in a planning model. It may not be feasible to have drivers for all general ledger line items. For these, trending against historical norms may make the most sense.

Rolling Forecast

The more realistic your assumptions, the more accurate your forecasts will be. Imagine a hotel making business decisions for 2020 solely based on its budget and performance from 2019. It would result in a lot of bad decisions since 2019 had “normal” circumstances and 2020 ended up being the worst year ever for the hotel industry. It looks at your past performance and uses those numbers to project how much you’ll spend in the future.

• Good rolling forecasts can be easily updated with the most recent financial and sales data, creating instant insight into business trends.
• This also means that new factors are taken into account during the course of the year if necessary.
• Remember, rolling forecasts use qualitative and quantitative data.
• This concept is promoted by the Beyond Budgeting Roundtable, which is led by industry guru Steve Player.
• And is a key best practice in financial planning and analysis.
• This helps to keep your organization on track through better insight and better decisions.

Megan O’Brien is Brainyard’s business & finance editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Clarify resource allocation (How much should we spend on advertising? Which departments require more hiring? Which areas should we invest more into?). Discover the top 4 reasons why more than 2,500 organizations worldwide rely on Jedox.

Would My Organization Benefit From Rolling Forecasts?

Rolling forecasts are supposed to dynamically inform business decisions. Collaborate with senior leaders to determine how they will use the forecast for mid-cycle resourcing decisions. It may benefit companies to survey top executives’ priorities at the beginning of each month to decide what reports to run.

A complete view of the business becomes challenging to maintain. Rolling forecasts usually contain a minimum of 12 forecast periods, but can also include 18, 24, 36, or more. Identify the strategic goal and begin with that goal in mind. Engage stakeholders’ willingness to embrace the new process and drive toward the organizational goals. Mosaic integrates with your existing tech stack so teams have the freedom to choose the combination of systems that work best for their company. It’s usually not one punch but a series of small jabs that knock forecasts off track.

Instead, we recommend performing an analysis of your sales and marketing funnel with a model to match. Check out our whole separate article on how to forecast revenue. But these have been hot-button topics in finance for years. Forcing the issue with outdated technology and processes may work for a little while.

Find Out How Rolling Forecasts And Workday Adaptive Planning Can Revolutionize Your Business

Rolling forecasts hinge on operational events rather than financial outcomes alone. They work backward from operational metrics, tracking the critical KPIs that directly impact business performance. This approach to financial assumptions leads to more accurate predictions and creates a foundation for agile planning. Whatever length you choose, the idea is to strive for near perfection within the current period and understand the impact of trends going forward. Work with business leaders to choose the appropriate duration and frequency.

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. The future forecast period can extend to the end of the fiscal year, but in most cases, the rolling forecast period typically extends out 4 to 6 quarters into the future.

How Rolling Forecasts Differ From Traditional Forecasting

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. The key element to all forecasts is that they are created for a specified period of time. The period used depends on the industry and the current or standard market volatility in that industry.

That is, it relies on an add/drop approach to forecasting that drops a month/period as it passes and adds a new month/period automatically. This enables companies to project future performance based on the most recent numbers and time frame, which offers an advantage when operating in a fluid and ever-changing business environment. The technique relies on an add/drop approach to financial forecasting that creates new forecast periods on a rolling basis. Businesses establish a set period, such as quarters or months, to update their forecast. At the end of every period, a new period is added to the forecast, so businesses can regularly adapt their financial planning to reflect recent trends.

Prerequisites For Rolling Forecast Adoption

They could account for lower occupancy rates and less revenue, which they could then build into their budget. Forecast accuracy decreases when performance rewards are tied to the outcomes. Setting targets based on a forecast will lead to greater forecast variance and less useful information. An organization should have a periodic planning process in which targets are set for managers to achieve. Those targets should not change based on the most recent forecast. This would be like moving the goal posts after the game starts.

Year to date is based on the number of days from the beginning of the calendar year . It is commonly used in accounting and finance for financial reporting purposes. Budgeting is the tactical implementation of a business plan. To achieve the goals in a business’s strategic plan, we need some type of budget that finances the business plan and sets measures and indicators of performance. What are the greatest flaws of your current forecasting system and how can that behavior be changed? For example, if budgeting is only done once a year and that is the only time a manager can request funding, then sandbagging and underestimating will ensue as a natural tendency to protect one’s territory.

Best Practices For Successful Rolling Forecasts

Since it doesn’t get updated, it becomes more inaccurate every month. Eventually, it’ll get to the point where your actuals are so far off from your budget that you don’t even feel a need to check it anymore.

• This is one of the biggest benefits of a rolling forecast.
• It provides managers with a timely vision into the next twelve months at any given point in the year.
• Additionally, a rolling forecast can provide organizations with improved flexibility, agility, and effectiveness in budgeting and planning as the rolling forecast is future-focused.
• The “yes” or “no” call on new resource requests is backed up by accurate forecasts.
• Maybe that product you introduced is a huge hit, or you make hand sanitizer and there’s suddenly an interest in cleanliness.
• They should be rewarded when the company achieves set targets and held accountable when the company fails to meet targeted performance.

Excel remains the day-to-day workhorse in most finance teams. For larger organizations, the traditional budget process usually involves building the forecast in Excel before loading them into an enterprise resource planning system. 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.

Should You Use Rolling Forecasts? Weighing The Pros & Cons

Whether you’re reporting your performance to investors or fundraising, a rolling forecast makes presenting your numbers easier. Having advanced knowledge of possible or likely scenarios or outcomes helps company management make better decisions.