Rolling forecasting is a forecasting method that takes into account changes in market conditions over time. This type of forecasting allows businesses to stay one step ahead of market changes and better plan for the future. Rolling forecasting is a predictive tool that looks at past trends and data to anticipate future trends.
In the business world, accurate forecasting is crucial for strategic success. Traditional methods, often reliant on static spreadsheets and historical data, can quickly become outdated in today's fast-paced environment. This reliance on spreadsheets can lead to errors, missed opportunities, or misaligned strategies. Rolling forecasting, on the other hand, offers a dynamic, adaptive approach, continuously refining predictions based on fresh data and emerging trends.
1. What is Rolling Forecasting?
A rolling forecast is a financial forecasting approach that regularly updates and extends a company's financial projections by incorporating actual data and adjusting future expectations. It is a dynamic forecasting technique that replaces the traditional static annual budgeting process with a continuous forecasting process.
Rolling forecasts provide organizations with a more flexible and responsive planning tool that allows them to adapt to changing market conditions, business dynamics, and emerging trends. Instead of relying solely on fixed annual budgets, rolling forecasts typically cover a specific time horizon, such as 12 months, and are updated periodically, such as monthly or quarterly. As each period elapses, a new forecast period is added to the end, maintaining the specified time horizon.
2. Benefits of rolling forecasts
2.1. Improved accuracy
In a traditional budgeting process, a company might create an annual budget based on the previous year's data and some assumptions about growth and market conditions in the coming year. However, once this budget is set, it often remains fixed for the entire year, even if the assumptions on which it was based change. This can lead to inaccuracies in the budget as the year progresses, especially if there are significant changes in the business environment.
For example, consider a retailer that creates an annual budget in December for the following year. This budget is based on the assumption that the retailer's sales will grow by 5% in the coming year. However, in March, a competitor announces a new product that takes market share away from the retailer. As a result, the retailer's sales are flat for the year. In this scenario, the retailer's budget would be inaccurate because it needed to account for the change in market conditions.
On the other hand, a rolling forecast would allow the retailer to update its sales forecast in response to the competitor's product announcement. The retailer could revise its forecast for the rest of the year, considering the expected impact of the competitor's product on sales. This would lead to a more accurate forecast of the retailer's financial performance.
2.2.Enhanced agility
Rolling forecasts create a dynamic and adaptable planning process that can adjust to changes in the business landscape. Because these forecasts are updated regularly, they reflect the latest market conditions, operational results, and strategic initiatives. This ongoing visibility into future performance allows companies to adjust their strategies and operations more quickly than they could with a static annual budget.
Imagine a manufacturing company that experiences an unexpected supply chain disruption due to a global event (e.g., a pandemic or natural disaster). The original budget may not have accounted for the increased costs of sourcing materials or the potential production delays. With a rolling forecast, the company can quickly revise its financial expectations and adjust its operations and strategy, perhaps finding alternative suppliers or accelerating digital transformation efforts for improved logistics.
In a rapidly changing business environment, the ability to quickly adjust plans and expectations is a valuable asset.
2.3. Better scenario analysis
Rolling forecasts amplify the power of "what-if" scenario analysis by constantly updating with the latest data and trends. For instance, a retail company seeing a sales dip in a product can swiftly adjust its forecasts, running scenarios to gauge future impacts and adjust strategies accordingly. This real-time adaptability, beyond just annual budgeting, allows businesses to respond promptly to market shifts. A manufacturing firm, for example, can quickly analyze the repercussions of supply chain disruptions, ensuring they're always prepared for unforeseen challenges.
The agility of rolling forecasts means businesses can run scenarios whenever significant changes arise, leading to more strategic and confident decisions. A healthcare provider might use these forecasts to track patient demographics, using the insights to make informed choices about resources and services. In essence, rolling forecasts transform scenario planning into a more dynamic, strategic tool.
2.4. Stakeholder engagement
Stakeholder engagement in rolling forecasting is essential. By involving all relevant parties, businesses get a clearer, more accurate picture of future trends. This collaboration builds trust and ensures everyone is aligned in their strategies.
However, it's not always smooth sailing. Different opinions can clash, and too many voices might complicate decisions. Take Apple Inc., for example. When planning product launches, they consult everyone from suppliers to software developers. This broad input helps them predict market demand and ensures smooth product releases, like the iPhone's consistent success.
3. Tips on implementing rolling forecasting
Know your why: Figure out the main reason you're using rolling forecasting. It could be for faster decisions, better planning, or just a new way to do things.
Talk to leaders: Make sure the top people in your company are on board and understand the change.
Decide the length: Think about how far ahead you want to forecast. Some companies look a year ahead, others even longer. Pick what's right for you.
Keep it simple: Focus on the big things that matter to your business. Don't get lost in tiny details.
Get good software: Use software that makes forecasting easy and accurate.
Update often: Change your forecasts regularly, like every month or so, to keep them fresh.
Use forecasts for decisions: Make sure you're using your forecasts when making big decisions.
Train your team: Teach everyone how to use the new system.
Listen and adjust: If something's not working, be ready to change it.
Be patient: Changing to rolling forecasts is a big step. Help your team see the good side, support them, and celebrate small wins.
Stay ready to change: Business can change fast. Be ready to adjust your forecasts when needed.
4. Potential risks of rolling forecasting
Rolling forecasting, while advantageous in many ways, does come with its set of challenges. Some of the primary pitfalls include:
Risk of overcomplication: As businesses aim to capture real-time data and trends, there's a temptation to delve into excessive granularity. For instance, a tech company might try to forecast sales for every individual product variant in every region, leading to an overwhelming amount of data that's hard to manage and act upon.
Resource strain: The continuous nature of rolling forecasts demands consistent attention. A retail chain, for example, might find its finance team overwhelmed when trying to update forecasts monthly without the right tools, especially during peak seasons like the holidays.
Risk of inconsistency: With frequent adjustments, there's a chance that different departments or teams might not always be on the same page. A global manufacturing firm might have its European division making decisions based on one forecast, while the Asian division uses another, leading to misaligned strategies and potential inefficiencies.
Danger of overreacting: While rolling forecasts aim to be adaptive, there's always the danger of overreacting to short-term fluctuations. An e-commerce platform, for instance, might see a temporary spike in sales due to a viral trend and overinvest in inventory, only to find demand waning a month later.
5. Using a dedicated FP&A tool for rolling forecasting
Navigating the challenges of rolling forecasting requires both strategy and the right tools. A dedicated FP&A tool can be a game-changer. These tools streamline the forecasting process, providing:
Minimized over-complication: By focusing on essential metrics and automating data collection.
Resource efficiency: Through automation, teams can avoid manual work and concentrate on bigger goals.
Consistency: Centralizing data ensures all departments work from the same information.
Informed decision-making: Differentiating between short-term trends and lasting changes.
With the right tools in place, businesses can sidestep common pitfalls of rolling forecasting and enhance their decision-making process.
6. Free Download - Rolling Forecast Template
Embarking on the rolling forecasting journey can seem overwhelming, especially if you're unsure of the starting point. To ease this transition, we're offering a free Excel template tailored to streamline your forecasting endeavors.
Here's a snapshot of what our template offers:
Sales Planning: This is all about a bottom-up approach, focusing solely on the SKU level. It eliminates the complexities of customers, regions, or territories, providing a straightforward overview.
COGS Overview: The template allows for the entry of COGS as a final figure. Given the absence of detailed COGS components, it's best suited for businesses outside of the manufacturing realm.
Cost Planning: Navigate your expenses at a broader level. Instead of getting entangled in specific accounts, you can concentrate on particular departments. What's more, you have the autonomy to adjust these departments as per your company's needs.
Workforce Cost Projections: Efficiently forecast your workforce-related expenses. The template facilitates calculations based on headcount and average costs, and you also have the flexibility to allocate these costs to distinct brands.
Given its design and features, this template serves as a high-level plan, making it an ideal fit for any company involved in distribution or sales.
While Excel provides a familiar platform, remember its inherent limitations, as discussed in our earlier chapters. But for those just starting out or seeking a simplified approach, our template offers a solid foundation.
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