Rolling forecast is a financial planning and forecasting approach that involves continuously updating and extending the forecast based on the latest available data and information. Unlike traditional static annual budgets or fixed-length forecasts, rolling forecasts are typically updated on a regular basis, such as monthly or quarterly, and project future performance over a specified time horizon.
The main characteristic of rolling forecasts is that they continually incorporate new information, allowing organizations to adapt to changing market conditions, economic factors, and business dynamics. As the current period elapses, the forecast is extended by adding a new period, maintaining the same forecast horizon. For example, if a rolling forecast covers a 12-month period, as each month passes, a new month is added to the forecast, keeping it consistently projected for the next 12 months.
Key features and benefits of rolling forecasts
Implementing rolling forecasts requires effective data management, robust forecasting methodologies, and clear communication across the organization. It is important to establish a process for collecting, analyzing, and incorporating new data into the forecast, as well as defining responsibilities and timelines for updating and reviewing the forecast.
Flexibility: Rolling forecasts provide flexibility in adjusting the forecast as new information becomes available. They allow organizations to react quickly to market changes, emerging trends, and internal dynamics, enabling more agile decision-making.
Continuous Planning: By updating forecasts at regular intervals, organizations engage in ongoing planning and monitoring rather than relying solely on annual budgeting. This helps to ensure that plans and targets remain relevant and realistic throughout the year.
Improved Accuracy: Rolling forecasts incorporate actual performance data from previous periods, providing a more accurate basis for predicting future performance. This iterative process allows organizations to refine their forecasting models and assumptions, resulting in more precise forecasts over time.
Early Warning System: By monitoring and analyzing performance on an ongoing basis, rolling forecasts can act as an early warning system, identifying potential risks, challenges, or deviations from targets. This enables proactive management and timely corrective actions.
Resource Allocation: Rolling forecasts assist in optimizing resource allocation by aligning investment decisions and resource allocation with updated forecasts. This helps organizations allocate resources efficiently based on changing priorities and business conditions.
Alignment with Strategy: Rolling forecasts facilitate better alignment between short-term operational plans and long-term strategic goals. By continuously reviewing and adjusting forecasts, organizations can ensure that their plans and actions are consistent with the overall strategic direction.
Overall, rolling forecasts offer a more dynamic and responsive approach to financial planning and forecasting, enabling organizations to adapt to the ever-changing business environment and make more informed and timely decisions.
Key approaches for rolling forecasts
It's important to note that the specific approach used for rolling forecasts can vary based on the organization's needs, industry, and available data. The frequency of updates, the length of the forecast horizon, and the methods for incorporating new data should be tailored to fit the organization's requirements and its ability to gather timely and accurate information.
Incremental Approach: This approach involves extending the existing forecast by adding a new period at the end while maintaining the original forecast horizon. For example, if the rolling forecast covers a 12-month period, after the current month ends, a new month is added, keeping the forecast projection for the next 12 months. This approach ensures a consistent forecast horizon as time progresses.
Time-Based Approach: In this approach, the forecast is updated at regular time intervals, such as monthly or quarterly. At each interval, the forecast is extended by adding a new period at the end, reflecting the updated outlook for the future. The length of the forecast horizon remains constant, but the forecast values are revised based on the most recent data and information available.
Rolling Average Approach: With this approach, instead of extending the forecast horizon, a rolling average is used to smooth out variations and incorporate new data. For example, if the forecast is based on a three-month rolling average, the oldest period is dropped, and the newest period is added to calculate the average. This allows the forecast to adapt to changing trends while maintaining a consistent time frame.
Scenario-Based Approach: In this approach, various scenarios or alternative assumptions are considered in the rolling forecast. Different scenarios may reflect optimistic, pessimistic, or moderate outlooks for key variables impacting the forecast. By assessing the potential impact of different scenarios, organizations can evaluate the range of possible outcomes and make more informed decisions.
Driver-Based Approach: This approach focuses on identifying and tracking the key drivers or factors that impact the organization's performance. The forecast is adjusted based on changes in these drivers. For example, if sales volume is a critical driver, any updates or changes in projected sales volume will be incorporated into the rolling forecast.
Pros and cons of rolling forecast
Implementing a rolling forecast requires establishing a structured process for data collection, analysis, and communication, as well as defining clear roles and responsibilities within the organization. Collaboration between different departments and regular communication with key stakeholders are essential to ensure the success of rolling forecasts.
Rolling forecasts offer several advantages and disadvantages. Here are some of the pros and cons of implementing rolling forecasts:
Pros
Agility and Flexibility: Rolling forecasts provide organizations with the ability to adapt quickly to changes in the business environment. By incorporating new information and data on a regular basis, organizations can adjust their plans and strategies to respond to emerging opportunities or challenges.
Improved Accuracy: Rolling forecasts rely on the most up-to-date data and information available, making them more accurate than static annual budgets. By continuously updating the forecast, organizations can refine their projections, resulting in more precise predictions of future performance.
Enhanced Decision-Making: With rolling forecasts, decision-makers have access to real-time insights and performance data, enabling more informed and data-driven decisions. They can identify trends, risks, and opportunities early on, allowing for timely interventions and adjustments.
Resource Optimization: Rolling forecasts help organizations allocate resources more efficiently. By regularly reviewing and adjusting forecasts, organizations can align their investments and resource allocations with changing priorities and market conditions, improving resource utilization and maximizing return on investment.
Continuous Planning: Rolling forecasts facilitate ongoing planning and monitoring. Rather than relying solely on a static annual budget, organizations engage in regular reviews, adjustments, and iterations, ensuring that plans remain relevant and aligned with strategic objectives throughout the year.
Cons
Increased Resource Requirements: Implementing rolling forecasts can be resource-intensive, requiring regular data collection, analysis, and reporting. Organizations need to allocate sufficient resources to maintain the process and ensure accurate and timely updates, which may strain some smaller or resource-constrained organizations.
Data Availability and Quality: Rolling forecasts heavily rely on timely and accurate data. If data collection processes or systems are inefficient or unreliable, it can impact the quality and usefulness of the forecasts. Organizations need robust data management practices and systems to support rolling forecasts effectively.
Time and Effort: Rolling forecasts require regular updates and reviews, which can be time-consuming. Organizations must commit to a continuous planning process, involving stakeholders from different departments, and ensuring effective coordination and communication.
Risk of Overreacting to Short-Term Fluctuations: Rolling forecasts, by nature, respond to short-term fluctuations and new data. While this flexibility is beneficial, there is a risk of overreacting to short-term changes, potentially leading to inconsistent decision-making or unnecessary shifts in strategy.
Complexity and Integration: Integrating rolling forecasts with other financial and operational processes can be challenging. Organizations need to ensure that rolling forecasts align with other planning activities, such as budgeting and strategic planning, to maintain consistency and coherence across the organization.
It's important to note that the pros and cons can vary depending on the specific circumstances and context of each organization. Rolling forecasts may be more suitable for organizations operating in dynamic and fast-paced industries where flexibility and agility are critical. Assessing the potential benefits and drawbacks, and considering the organization's resources and capabilities, can help determine whether rolling forecasts are a suitable approach for a particular organization.
