Is Rolling Forecasting Right For My Business?
Businesses need to adapt to a lot of change these days. Everything from new technology to client expectations is subtly – and sometimes not so subtly – altering many business plans, and the changes in budget forecasting is no exception. The old method used to be that a company would create a firm budget in advance in preparation for the year ahead, but with the way that businesses can shift from profits to loss on the turn of a dime, it’s entirely possible that these budgets become out of date quickly. With traditional methods of forecasting being deemed unreliable in today’s marketplace, the concept of rolling forecasting is gaining popularity. The notion that you can create an agile, reactive type of budget that keeps moving with your business, rather than being a fixed number with an end date, is intriguing to many companies – and for good reason.
Let’s take a look at how rolling forecasting differs from traditional forecasting, and what it could mean for business budgeting going forward.
Differences From Traditional Forecasting
As mentioned in the introduction, businesses used to create their budgets for the next year through long and sometimes tedious processes. CFO Magazine even humorously refers to the yearly budget as a “much-hated annual exercise in setting targets, doling out resources, and providing incentives for employees” – and even quotes a program director as saying, “It’s a management process that can kill the organization.”
Harsh? Possibly. Yet traditional forecasting in budgets is largely seen as part of the “old way” of thinking when it comes to finance; as many companies move towards going high-tech, it’s easy to see how traditional budgetary exercises could be seen as obsolete. But for some, it’s more comfortable to stay with what you know, and so they remain allocating resources towards putting together a yearly budget as usual.
If you have a small business in an industry that is completely impervious to change, this method could still work fairly well. However, adapting rolling forecasting is a solid solution to help adapt to the changes and unpredictable events that can happen in the majority of other industries. You might feel confident in your unshakeable set of numbers and goals for the following year, but what happens if there’s an unforeseen downturn in the market? Perhaps there will be an unfortunate natural disaster that wipes out part of your profits. The reality is that in this day and age, nothing is for certain, and that’s something that many businesses need to take into consideration before putting together an iron-clad budget for January through December.
Rolling forecasting enables businesses, both large and small, to update their financial plan on an ongoing basis. It’s true that it requires more effort and resources than a one-size-fits-all traditional budget, but it pays off when you have the flexibility to change projections based on everything from new regulations to different competition to product change.
What It Means for Your Business
Two of the biggest benefits include the ability to be flexible and the allowance for uncertainty. By nature, budgets make assumptions about what will take place over the coming year, but assumptions don’t always play out as expected, so businesses should have the freedom to make adjustments as they go.
Although it’s understandable that you’d rather not be wrong, in truth no business can be 100% certain that their budget predictions will be on point. That’s why rolling forecasting is a good choice for many companies, particularly those whose budgets and profits rely on industries that can be unstable.
The CFO Magazine piece uses Statoil, a Norwegian oil company, as a prime example of implementing rolling forecasting:
“Today, Statoil still makes forecasts, sets targets, and allocates resources. It just doesn’t force these different purposes into one single set of budget numbers… The traditional January-to-December calendar year is a thing of the past, replaced by the setting of long-term targets that might be 18 months and more away and shorter-term horizons of 3 to 4 months. There is no annual process for forecasting the following year; instead, the company hews to an event-based dynamic forecast.”
Again, rolling forecasting differs from traditional forecasting in that it’s basically a living document rather than something static. That means it needs more hands-on time, and much more focus in order to keep targets relevant for what’s currently happening in your business and the market as a whole. Also, warns the American Management Association, there’s the need to be realistic and grounded: “Ideally, you don’t want to look too far into the future or it tends to become too hazy, unrealistic and unpredictable, but you also don’t want to keep the time horizon too short or you’re not seeing the full impact of your decisions.” As with any change to business processes, it takes some time and refining to get used to a rolling forecast rather than a traditional fixed budget, but the agility it can provide is second to none.
Lastly, adapting rolling forecasting for a business budget can have the added benefit of keeping things realistic, and not allowing system manipulation. American Management Association goes into a little more detail with this notion, pointing out that the budget “actually turns into an internal negotiation with management, a gamesmanship of sorts, where rather than developing a budget that realistically reflects a view of where the company is going, ends up being something largely fictitious and arbitrary.” Since a budget is always a benchmark of company success, there’s less chance of “fixing the game” with a lower figure that can easily be hit for a guaranteed win.
Rolling With Change
Instead of creating a fixed budget prediction that may become obsolete in a manner of months, rolling forecasting moves with the company’s highs and lows and allows for much-needed flexibility in today’s volatile business world. If your small business occupies a unique spot in a niche market that remains unchanged, sticking with a traditional budget may still work for you. And if your company wants to make the switch, know that it’s not quick. The process will be time- and resource-consuming, but the ROI will be well worth it. If you are tired of the traditional budget, perhaps a rolling forecast is just the change you need in your business.
Do you use rolling forecasting in your business budget? If not, then tell us how a traditional budget works for you.