Rolling forecast vs static budgeting
In theory, a static budget shouldn’t change until the end of a set period of time. The budgeted amount is agreed long in advance, and ideally is not changed until the end of that period. This can help to set clear expectations.
But traditional annual budgeting has an obvious flaw in its forecast period: the window gets smaller the closer you get to the end. Using the calendar year, if you check the forecast in January you have the full 12 months planned out. But if you check it in October, you’ll only have three months. And the real world doesn’t actually stop on December 31st.
Rolling forecasts also work with a set time frame, but with no end date. The typical example is a 12-month rolling forecast, updated either quarterly or monthly. This gives you a plan for the coming 12 months no matter when you look at the budget - not just until the end of the calendar or fiscal year.
This also means that if something significant happens midway through the year, it’s relatively easy to adjust the forecast and budget. In fact, you’re planning on it.
In practice, very few annual budgets survive the full year without adjustments. There are always external forces to consider or unforeseen circumstances. For the rolling forecast, this is a feature, not a bug.
Advantages of rolling forecasts
Why move to a rolling forecast model?
The clear issue with annual budgeting is that change is constant. Everything from market conditions, to investor confidence, to government policy can change business performance. Unless you’re a truly gifted forecaster (and very lucky), you’ll almost never see what’s coming 12 months in advance.
Which means annual budgets get adjusted all the time based on new forecasts. And this begs the question: how much can you really rely on a long-term forecast without regular updates?
Rolling forecasts let you stay agile and make business decisions in real time. In a particularly unpredictable economic or business environment, agility is essential.
No more “using up the budget”
There’s a familiar concept that drives engaged finance teams wild: “if we don’t spend the budget, they won’t give us the money next time.” In practical terms, this may be true. But it’s also a terrible way to use hard-won company resources.
The rolling forecast and budget means that fewer funds are committed far in advance, and teams have no reason to spend (unnecessarily) up to their limits. Each new project requires a business proposal, and finance teams know where money is going in closer to real time.
Spend reflects your value drivers
Good financial planning should be based partly on actual performance, and not simply on your best guesses. And what works well for you one year (or quarter) may look quite different the next.
An effective rolling forecast lets you make resource allocations based on actual results, hopefully in a short time frame. You don’t wait until the end-of-year financial statements to choose your next move - you strike while the iron is hot.
And conversely, if your value drivers change - if you no longer get real value from a particular campaign or sales approach - you know about it right away and act accordingly.
Forecasts are built on actual performance
Traditional financial forecasting at the company level requires input from all departments, each with their own incentives. Each supplies projections and likely targets for the year to come. For revenue-driving teams, it makes sense to artificially deflate these projections - to keep their targets low and achieveable. This leads to better compensation.
For others, projections may be inflated to receive more resources. And others still may just be an overly optimistic (or pessimistic) guess of what’s to come nine months from now.
Whatever the case, you’d always prefer to use the most up-to-date financial reporting to build your forecast - not projections and results from up to a year in the past.
A closer eye on cash flow
The rolling forecast model is arguably most popular in difficult economic times. Companies want to know that every payment has a purpose, and don’t want to commit to significant costs too far in advance.
But there’s great reason to use the same driver-based budgeting process in positive times. When a particular driver brings results, that’s exactly where you want to put further resources. The rolling forecast process lets you reallocate resources in real time, and double down on the happy surprises you find throughout the year.
Disadvantages of a rolling forecast
Why stick with a more traditional forecasting approach?
For FP&A teams and budget managers, there’s usually not the same mad budgeting pinch to plan the next cycle. That’s the good news. The tradeoff is that budget conversations are ongoing.
There will always be adjustments to make, new campaign proposals to deal with, and a constant reforecasting process. And particularly without the right FP&A tools (or an excellent Excel sheet), this is no easy feat.
The major advantage of a fixed budget is that it’s easy to understand and helps teams plan in advance. Stakeholders like the predictability they get from seeing what’s committed. Budget managers know the exact parameters to work within, and can effectively plan the whole year to come.
This is particularly valuable for team members who aren’t comfortable with financial data. It’s typically simpler to give them a broad spend window and let them make the better decisions within this.
Two kinds of businesses may have no need for a rolling forecast: the very large, stable enterprise working to a 3-5 year plan, and the very small, agile startup with minimal budgeting to begin with.
In both cases, the time-consuming FP&A work very rarely leads to change and is largely wasted. In those larger companioes, the solution may actually be to install rolling forecasts at the campaign or team level, and keep the company budget more classic. This keeps individual teams agile and effective, without dedicating huge resources at the company level.
The prerequisites for a rolling forecast model
What do you need to have or consider before getting started?
Up-to-date financial data
This was hinted at above, but the typical closing cycle can be a blocker for real-time financial modeling. If you close the monthly or quarterly books in a few days, then your FP&A team can quickly update the forecast. No issues.
If you take weeks or months to close the books, or if you have to wade manually through expense claims and credit card statements, a rolling forecast becomes a very heavy lift.
The key is automation and finance systems that speak to each other. We suggest a smart spend management solution to handle payments, connected directly to your accounting system or ERP, which then updates your FP&A tool (or Excel sheets) almost instantly.
Great finance tools
Many finance teams do good work with Excel, including building rolling forecasts. But it’s asking a lot, and you may lose out on some of the automation available today.
Other options include a well-designed ERP, or what’s known as a Corporate Performance Management (CPM) tool.
A mindset shift
However you proceed, there will be plenty of teething issues and a lot of setup before the forecast goes live. A rolling forecast is an excellent option for a wide range of businesses, but for most it means change.
Expect stakeholders to be confused, nervous, and annoyed at first. They’ve become used to a certain process, and they’ll assume that this change is based on something going wrong.
Be prepared to explain - over and over - how the new process works and why it makes more sense for your business.