Many businesses spend weeks or months laboring over the annual plan, even though by the time it’s finished, the market has changed dramatically and its assumptions are out of date.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: rolling forecasts. That’s because rolling forecasts allow management to continuously plan and reallocate resources based on the latest results.
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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.