Rolling forecast

Rolling forecast

Rolling forecast is the process of simulating profit and loss accounts for a company on rolling basis.

Traditionally, the budget process has been a one-off event, albeit a long and arduous one. Forecasts, though more frequent, remain a series of one-off quarterly events. Significant gains can be made from eradicating this single period/annual mindset and moving to a rolling forecast approach.

The quarterly rolling forecasting when it evolves into quarterly rolling planning is a process that will impact the organisation. It removes the main barriers to that an annual planning process erects. With rolling forecasting budget holders are encouraged to be pro-active, as forecast will have a horizon of e.g. 6 quarters there is real relevance to forecast figures, the process is less costly and time consuming and the remuneration system is not based rather on quarterly targets instead of an annual target.

The idea of budgeting for a year ahead was developed in a time of stable markets, static costs, and predictable inflation. Fixed plan business models can’t be used to run businesses in today's rapidly changing world. In consequence, some leading organisations have abandoned budgets and changed to rolling forecasts to inspire and lead their organisations to better performance. Rolling forecasts direct management’s attention towards the future, and ensure that planning is ongoing, as opposed to an annual exercise. Finance departments are also rethinking their role and contribution, and how they add value. In a world demanding shareholder value creation, finance departments focus on value adding activities such as:

 Rolling budgets and cash forecasts. Business cases and financial appraisals for projects. Scorecards and benchmarks. Building a low cost culture. Incentive reward schemes.

Of all these activities, rolling forecasts are the most important and most likely to add value. In a recent survey by the Economist, 70% of financial directors in Europe ranked planning and budgeting reform as their top priority.

Many organisations still begin their financial year by preparing an annual budget. This practice is a legacy from the 20th century, when directors tried to force managers to commit to achieving their apollon plan, no matter what. But fixed budgets and inflexible directors are ineffective in a rapidly changing world. Companies report performance on a calendar basis, but floods, stock market crashes, strikes, and a competitor's new product announcement, happen continuously. The 2001 attack on the Twin Towers in New York invalidated most corporate budgets in the United States. It eroded belief in fixed plans for business and government, and demonstrated the necessity for planning systems that are dynamic, responsive and flexible.

Sources: Beyond Budgeting Round Table - www.bbrt.orgStretch J Managing with rolling forecasts - www.johnstretch.com

Frasier and Hope: beyond budgetingLalli the handbook of budgetingKaplan and Norton, the strategy focused organization


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