Every finance leader knows the routine. Every year, as budgeting season approaches, the rest of the business turns to finance in order to make sense of the last 12 months and prepare for the next 12.
First, you look backwards, to assess the progress towards last year’s stated objectives. You work with manually aggregated data and consolidated spreadsheets (both often error-prone) to discover results and generate reports. You analyze targets, performance, and spending to provide the business with an accurate reflection of its financial position.
And then you look forwards, using that information to plan next year’s objectives. You think about future goals and enshrine them in a firm financial strategy. You make choices, assess trade-offs, and accept sacrifices. You settle on a new top-line target, and divide it into contributions between different functional teams.
Then, after spending weeks or months laboring over the annual plan, by the time it’s finished, the market has changed dramatically and its assumptions are out of date.
Case in point: The disruption caused by Covid-19. But there’s a better way: continuous planning.
Continuous planning gives FP&A organizations a real-time view of the business. When decision-makers have the ability to understand what’s happening with the business now, they can accurately model what is likely to happen in the future. Unlike outdated, static planning, continuous planning enables agility with plans that are always current, insight with easily created and iterated what-if scenarios.
A foundational element of continuous planning is rolling forecasts, which allow management to continuously plan and reallocate resources based on the latest results.
Instead of being once-a-year exercises, rolling forecasts happen on a regular cadence. Unlike budgets that may have hundreds of line items, rolling forecasts focus on key business drivers. And rather than focusing on the past, rolling forecasts act as early warning systems when you’ve drifted off-course; they help to raise visibility beyond the traditional budgeting “wall.” By continually updating your forecast with actuals, you’ll be able to quickly adjust the levers that drive performance.
Here are three ways rolling forecasts can help you plan for a changing world:
STEP 1. Choose the right forecasting horizon.
A rolling forecast is aligned to business cycles, rather than the fiscal year. To really help senior management look at the future and proactively manage it, a best practice is to forecast at least four to eight quarters past the current quarter’s actuals. However, there’s no hard-and-fast guideline for the time interval included in a rolling forecast. It all depends on your industry, your business needs, and how long it takes to make decisions about operations, capacity and spending. For example, How long does it take to change supply contracts?
STEP 2. Model your course on drivers, not details
Yes, your annual budget lists thousands of line items, but you need to perform rolling forecasts at a much higher level, or you’ll get bogged down in minutiae and your forecast will become a recompilation of budgets. Rolling forecasts based on key business drivers, rather than masses of detail, also become a “light-touch” (and therefore less onerous) process for everyone involved. Managers may mutiny if they think that rolling forecasts will require the work of a full budget, but they’ll be much more engaged if they know they can zero in on the few key variables that matter.
STEP 3. Sound out multiple “what-if” scenarios
The beauty of rolling forecasts is they allow you to model “what-if” scenarios to ensure your business keeps pace with change and is aligned to your corporate plan. By changing a few key assumptions and drivers, you can see their effect on the overall plan, such as the impact a price change has on headcounts and cash. For example, what-if analysis enables managers to perform studies that translate contemplated changes in product mix, processes, order parameters, and customer service into the implications for changes in resource supply and spending.
Executing against your scenarios
Executing against your what-if analyses and scenario plans shouldn’t only happen once a year as part of a static annual budget and planning process. A changing marketplace calls for active, continuous planning and monitoring that gives decision-makers the real-time information they need to course-correct when things change. The ability to create scenario plans to assess potential outcomes (best case, worst case, most likely case) is extremely valuable when variables are constantly changing around and within your business.
At a minimum, this means monitoring actuals continuously so you can keep an eye on organisational financial health. It also means keeping track of your leading analytics indicators (e.g., pipeline, customer LTV, attrition) so you can identify trends and patterns and recommend course-corrections when needed.
To execute against your scenario plans, you need to have access to easy-to-use, flexible, and robust reporting that captures all of the above, and does so on a continuous basis. And when the gathering, reconciliation, and distribution of your reports is automated, you’ll be able to transform reporting processes from a monthly rote exercise to a dynamic, ongoing driver of organizational change.
With a continuous view of the business, everyone in the business will be empowered to plan and see the results of the implementation and the execution of those plans.
A note on collaboration
Everyone company-wide in the organization has an impact on scenario planning and what-if analyses. And involving and engaging them in the planning process is critical. As underlying assumptions change to reflect the latest information, it’s critical to distribute information to people at all levels of the organization. If scenarios are easily translatable to stakeholders at all levels of the organization, it will be easier to engage them in strategy and get broader alignment on overarching objectives. They will also have the opportunity to challenge assumptions and raise critical questions about what is happening on the ground in daily operations.
But to engage stakeholders from all corners of the business in continuous planning, you need to make sure your data modelling tools are user-friendly and broadly accessible. Self-service reporting and visual dashboards, coupled with intuitive analytics and robust reporting, creates a culture of collaboration that puts information into the hands of everyone in the organization. After all, plans don’t work unless they reflect on-the-ground operational information.
Collaboration not only ensures accurate information, it also promotes more buy-in once plans are adopted—enabling you to test your scenarios, plans, and analysis. When everyone agrees on the validity and accuracy of the data, more time can be directed toward figuring out the best course of action.