Roll On Roller Coaster – The Rolling Forecast Budgeting Process
Agility is a key feature of any successful organization. The ability to adapt to changing circumstances without compromising on efficiency or profitability can pave the way to long-term growth and sustainability. One effective way in which businesses can become more dynamic is adopting a rolling forecast. Generally, every business follows some model of projection when designing their budget for the upcoming financial period. Budgets based on rolling forecasts can be adjusted as per changing business conditions, enabling businesses to leverage key opportunities to gain strategic advantages.
Many organizations are averse to following the rolling forecast model, assuming that they have to abandon their traditional annual budgeting process. In addition, adjusting the annual budget is a tedious process and constant chopping and changing can disrupt their operations. One solution is to implement a rolling forecast process as a supplement to the existing annual budget, rather than using it as the replacement for the annual budget.
A supplemental rolling forecast implementation path would start with the periodic budget (typically performed annually) and then forecasted out 12-24 months. As months are closed the rolling forecast model is updated and additional months are added. This process also produces an additional data point for variance analysis. During Quarterly Business Review (QBR) meetings, a common variance explanation would compare actuals against annual budget and against the rolling forecast. The farther away from the completion date of the annual budget, the more directionally correct the rolling forecast will likely become as it incorporates new information, but the annual budget sets a stake in the ground in regards to funding and performance and by which management can be held accountable to. The process regenerates when the periodic budget is performed again every year.
The idea that transitioning to a rolling forecast model will eliminate or replace your annual budgeting process can be challenging for many business managers and executives to handle and is impractical for many. Although, eliminating a periodic budget would be both a time and cost savings for many organizations, there is great value in the process of budgeting itself that forces an organization to look at costs and assess its strengths and weaknesses that would be lost without some type of periodic assessment process.
If looking to implement a rolling forecast process in your organization, things can be made simpler by adhering to the following best practices.
Commit To It
Sounds simple, right? As always, the commitment to adding a rolling forecast must come from senior management. A rolling forecast initiative may cause some chaos in the organization, with additional work being added to people’s plates throughout the organization. Business unit and department finance resources will need to report actual and forecasted numbers up to a centralized Financial Planning and Analysis (FP&A) department. The use of a Corporate Performance Management (CPM) system will greatly aid in making this process easier, but it can also be managed with Excel, PowerPoint, and emails.
The best way to get started is by testing the process with a business unit and/or department and see what works and what does not then change the underlying assumptions in the corporate forecast model and see what happens. Through testing, you will find that there are many parts of the organization that do not require as frequent of forecasting updates. For example, if you allow for a certain degree of forecast tolerance, shared services units of legal and accounting, may have expenses that fluctuate so infrequently, that they only need forecast adjustments on exception, and not monthly. Saving you hours of time to focus on the key drivers of the business where decisions can be made. The testing phase will provide you data which you can implement across the organization.
Utilize Drivers
Periodic budgets are most often built from the bottom up, starting at the individual general ledger line item and budgeting for each line item. When implementing a rolling forecast process, the utilization of a driver-based system will allow for increased enhanced collaboration between finance and the business, which will be critical for the rolling forecast process to succeed and faster and easier business modeling, which will increase the quality of the forecast.
A driver based approach also allows you to align key assumptions across the organization, standardize around a single methodology and allows for quicker modeling of different scenarios. Each driver can be mapped to a general ledger line item or series of line items affected.
Assess the Infrastructure
In addition to the change in practices and mindset, moving to rolling forecasts may require a change in technology as well. For this, you need to assess your current forecasting infrastructure and determine whether or not it is suited to the changing needs of your organization. For example, the current software systems being used for forecasting might not be suited for a rolling forecast and will have to be replaced. Do you need a packaged solution or will a spreadsheet based solution work? It is crucial that your business invest in the right technology before moving forward to facilitate the process and make the transition easier.
If the solution needs to be implemented, then what resources are needed and what timing? Will there be additional IT resources, new hardware, training, licensing, will you need temps for data entry? All of this will need to be figured out prior to full-scale execution of the process. In addition, an important thing to keep in mind is that any new software or tool introduced into the budgeting and forecasting process should be compatible with the existing IT systems currently in use throughout the enterprise, otherwise there will need to be a series of bridges built which will add to delays, data loss and possibly lead to other problems.
On top of the IT infrastructure, thought must be given to the process itself and the guidelines as to the forecast process for consistency throughout the organization. Questions that need to be answered are:
What is the forecast horizon?
At what level of detail will the forecast be?
What are the core assumptions (industry or GDP growth?, inflation, etc…), who will disseminate them and how often will they change?
All of this must be thought out and formalized, just as it has been for the annual budgeting process.
Define Roles
Change is tough and it is tougher if people do not know exactly what they are responsible for delivering and when. The biggest cost in implementing any process or new system is time. Time to train, resistance to change, time due to mistakes and rework, time to do everything.
To help alleviate this, key decision makers should be on call when moving to rolling forecasts during the first cycle. The collaborative nature of this model requires all relevant authorities to be actively involved to ensure all strategic objectives are being addressed and nothing is overlooked. A rolling forecast model can lead your organization towards a better future and therefore, the top personnel have to be on board.
Conclusion
Implementing a rolling forecast is all about making great things happen in your organization. It is the implementation of the strategic plan and vision that you have been a part of building, and you should be proud to be part of leading such a process.
