If 2020 has proven anything, it’s that even the most change-averse among us have no choice but to think about our businesses in new ways. Revenue streams have been disrupted, workforces have gone remote, and conditions are changing almost daily.
In these emerging moments of recovery, as we begin to regain some semblance of normalcy and prepare to return to work in some fashion, we will all be called upon to operate with agility and resilience. For finance teams, this means those traditional budgets and static forecasts that sufficed for years are sufficient no longer. Boards of directors, the C-suite executives, and the treasury function now require net cash flow by month to determine how much deficit cash they will need to finance.
The problems with an annual budget
The annual budget is perceived by many as a fiscal exercise done by the accountants that is: (1) disconnected from the executive team’s strategy, and (2) does not adequately reflect future demand volume drivers. The budget exercise is often scorned as taking months in advance to create after multiple executive “tweaks” for the numbers they want, being obsolete soon after it is published, and biased by the politically most muscled managers who know how to sand-bag their department’s budget request.
It is now clear that the world moves too quickly for organizations that limit themselves to forecasting annually. There is too much volatility, uncertainty, and complexity. That certainly has been the experience at ChristianaCare, a healthcare system that, in the midst of the COVID-19 epidemic, managed to transform its old annual budget process into a far more responsive monthly forecasting cycle. Impressively, ChristianaCare made the switch not in four or six months (as many might expect), but in just four days.
Ready to start growing again? Start with rolling forecasts.
Most businesses spent the past few months focused on the opposite of growth. Many have cut expenses in the face of revenue declines and lockdowns. Some even have turned to zero-based budgeting to dramatically trim expenses by budgeting from a clean slate and forcing business units to justify every capex, stratex, riskex, and opex dollar.
But as organizations begin to recover from the initial shocks of the pandemic, they’re looking ahead, with some even planning to grow: Diverzify, a leader in commercial flooring solutions, met the challenges of the COVID-19 pandemic by engaging previously modeled recession scenarios and a flexible forecasting process. Careful, decisive cost-cutting with a scalpel rather than a meat axe and limited workforce reductions kept the company operating without interruption. And now, Diverzify plans to quadruple its size over the next three years.
For ChristianaCare, Diverzify, and countless others, one key to navigating uncertain terrain has been by using rolling forecasts. By design, rolling forecasts are more current and granular and therefore more accurate. They give decision-makers clearer insight into the drivers and levers of their business, from pricing and product sales volume and mix to capital allocations and resource capacity workforce levels (e.g., number and type of employees). And with a faster cadence comes success. An Aberdeen Group study found that 75% of best-in-class organizations rely on rolling forecasts.
If you’re still relying on annual or even quarterly forecasts, it’s time to get rolling on a new approach. Here are four compelling reasons why.
- You can better evaluate opportunities and risks
With a static budget, particularly one created in spreadsheets, forecasting the effect that certain decisions will have on key drivers can be labor- and time-intensive. But with a rolling forecast, scenario planning and modeling can be as simple as plugging in a few critical numbers. For instance, say you’re ramping your business back up and assessing whether to backfill positions or continue to support remote staff.
You can get data-driven insights into both of these options more quickly—and more accurately—in a rolling environment. But relying on last year’s, or even last quarter’s, forecasts could leave you overpaying for talent or overestimating the capacity you need in a region that’s still hard-hit by COVID-19 infection and thus likely to take longer to recover. Working with a forecast fed by current data and updated on demand at frequent time intervals could mean the difference between avoiding a serious misstep (say, hiring too soon or too many people) and a prudent and well-timed revitalization of your business.
- You can course-correct and locate anomalies faster
It’s a myth that rolling forecasts are a shortsighted tool. Yes, their cadence is more frequent than an annual budget, but most rolling forecasts can project eight or more quarters in the future. Budgets are restricted to project to the fiscal year-end “wall.” And because the FP&A team is digging into the numbers frequently—while also eyeing the planning horizon—it becomes easier to spot and course-correct when projected expenses are higher than expected.
It’s now even possible to use machine learning to detect anomalies in plans and forecasts that could lead to errant assumptions and unwise decisions. So the inherent flexibility of a rolling forecast gives organizations a crucial advantage at a time when reforecasting is common. The idea is simple: Course-correct today to get back on track for tomorrow.
- You can quickly take advantage of integrated actuals
The power of a rolling forecast lies in its ability to continuously update a company’s outlook based on real-time data and educated calculations—essentially by tapping a single source of the truth. But once the fiscal books are closed for the quarter or year, many teams are surprised by the boost they get by swiftly integrating their actuals to reveal and analyze cost and sales variances—which makes for an even more accurate fiscal projection and more insights for the future.
With a smartly designed rolling forecast, you’ll be able to pull in this data quickly and with minimal effort, especially compared with an annual budget. In fact, many systems combine direct integration and automation, which means with a single click, all of the information from your GL, ERP, CRM, and HCM systems is imported from across the various departments or cost centers, possibly within just minutes of the books being closed. Critically, all this happens without a finance staffer having to manually key in all of the information—and risk the errors that come from manual data entry. A centralized hub for this data also reduces confusion and miscommunication.
- You can make reforecasting the norm, not the exception
Reforecasting shouldn’t be a fire drill or a special event. It should be an ongoing part of how you plan within a rolling forecast environment. As we’ve all seen, internal and external forces are bound to change. Having a robust schedule of reforecasting, along with a specific set of triggers (such as a certain percentage reduction in revenues or orders in your pipeline), will make the process repeatable, reliable, and more effective.
Get ready for what’s next
Odds are, all your finance colleagues know the high-level benefits of a rolling forecast. But what many might not realize is how much more agile and strategic they can be by adopting them. For example, consider the experience of Omnico Group, which provides a seamless platform for customer transactions and engagement. Faced with spreadsheet-based forecasting, Omnico found it impossible to analyze the trends that influence the income statement, balance sheet and the resulting net cash flow so critically needed now with the pandemic. But after implementing rolling forecasts, Omnico was able to help make growth-oriented decisions, whose positive impact has scaled as the company has grown.
If you’re feeling behind the curve as you read this, you should know it’s not too late. Plans still have to be created, decisions have to be made, and opportunities can be seized. Get the tools to help you do that—and get ready for what’s next.