The Rolling Forecast: budgeting a different way

Budgets are currently always centered around the year’s end. On January 1st, Finance will always start with a clean slate. New invoices, new contracts, new customers. But at the same time, all the projects, campaigns, and contracts for the business often simply carry on. So why don’t finance and business follow the same flow? I often wondered this myself out loud during my breakout-session at the Set Sail to Modernization event - a CCH Tagetik event for CFOs about the impact of modernization on their field.

 

I want to start with a quote from the Harvard Business Review:

 

“The term “budget” tends to conjure up in the minds of many managers images of inaccurate estimates, produced in tedious detail, which are never exactly achieved, but whose shortfalls or overruns require explanations.”

 

This quote is from 1984, but it’s still very relevant today. Research by PWC shows that organisations are still struggling with the same problems. The budgeting process occupies too much time and, when estimates are presented, they are usually already out of date. Even with today’s support tools and streamlined processes.

 

This creates a situation in which the budgets are no longer aligned with the strategic plans. And as these are multi-year plans and budgets, this alignment will become increasingly distorted. The plans are usually based on business drivers, but factors such as sales numbers and visitors can change significantly. The summer of 2018 illustrates this very well. With temperatures reaching way over 30 degrees, the sales of ice creams and air-conditioning systems went through the roof while, at the same time, visitor numbers to theme parks and events lagged behind expectations. An unexpected, long-lasting and hot summer can therefore have a great impact on your business drivers. And so also on the feasibility of achieving your strategic goals.

 

Budget processes in 2018

That is why I am arguing for the end of budgeting processes as we know them today. Of course, a budget is necessary, but it should be one which is based on the current 24-hour economy and the continuous flow of customer contacts, projects, and other business activities. Budgeting by means of a Rolling Forecast therefore makes much more sense. One of the forecasts, that you will still have to perform, will then serve as the budget for the fiscal year.

 

Working with Rolling Forecasts will give you three advantages. Firstly, employees will carry out the forecasts on a more structural basis and will therefore become better at doing so. This applies both to dealing with the tooling landscape, as well as the business reasoning behind it. Secondly, as it replaces the usual forecasting and budgeting process, your organisation will also work with fewer different planning processes. And thirdly, if you carry out forecasts more often, you can adjust your business based on the insights that you gain during the year.

 

How does Rolling Forecasting work?

Rolling Forecasting is a continuous process of looking ahead. In your actuals, you’ll continuously recreate a forecast based on the most important business drivers. In the simplified image below, the Rolling Forecast is displayed in the green blocks, whereas the red blocks represent the budget. Would you like to get to know more about how Rolling Forecasting works? Then take a look at this video.

Getting to work!

Would you like to support your business in the best way possible, and be seen as an important business partner? Do you want to look ahead based on reliable insights which you can easily adjust? In that case, you should consider working with Rolling Forecasts. As you’ll be re-evaluating and adjusting your performance expectations again and again, you’ll have a clearer view on where your organisation is heading and you’ll be more in touch with your strategic goals. And because you’ll be making predictions based on your most important business drivers, which you will monitor continuously, the alignment between the forecast and the business will remain strong.

 

Did reading this blog make you want to know more about the session or about how you can use a Rolling Forecast in practice? Then please contact me via LinkedIn.

 

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