Classic budget and forecast
A classic budget is characterised by companies creating a budget for the upcoming year during the fall and then making forecasting adjustments monthly, quarterly or every six months. This is the most common method.
Pros
- Everyone involved in the process usually has set aside time for creating a budget during the fall.
- You can decide whether you'd like to make your forecasting monthly, quarterly or every six-month, depending on what suits your business best.
Cons
- The planning horizon is limited to a couple of months because you tend never to look further than the budget year. With a rolling forecast, you look at least a year forward, no matter which month of the year you're currently in.
- With the classic budget effect, managers often spend what's left of the budget at the year's end. This way, they won't get a smaller budget next year. This way of thinking makes it quite hard for companies to save money and optimise their business.
Rolling forecast 12-18 months
Many of those that start using a system like Planacy do so because they want to forecast further ahead. Rolling forecasts can be done in different ways and with different forecasting horizons. One alternative is to update a specific number of quarters and then update the predictions monthly. A common phrase within forecasting is "rolling 12". This indicates that you have a rolling forecast with 12 months as a horizon.
Pros
- Rolling forecasting helps companies to get a better look ahead. That is: the forecast isn't limited to just the year after. Working rolling-12 is effective when you update the same month next year, based on the month just closed. This enables companies to be more precise in their forecasts, especially if you have recurring similarities in monthly fluctuations.
- You can choose the planning horizon yourself. More companies choose to start working with rolling forecasting, for example, 15 months instead of 12 months. The advantage is that the company, for example, September, gets the following year's budget "for free." The company could therefore save time and make financial planning more effective.
Cons
- The forecast for the same month but next year will only appear if you work with at least 12 months horizon. Furthermore, you can't compare the numbers between the years, which results in limited analysis.
- Most people within an organisation think and plan in calendar years, not in cycles of 15 months.
- Even though you could get a more precise forecast on seasonal effects, working with rolling forecasting of 12-18 months is problematic, wanting to compare different years. Suppose we use a fitness and health centre working with rolling 15 months as an example. At the end of the year, there are two different January in the forecast, the upcoming year and the one after. January is often characterised by people trying to meet new year's resolutions, for example, get in shape and buy a gym card. Fast forward to April, when people have gotten tired of their resolutions and stopped working out again. In April, you only get the January for the next year in the forecast, and the numbers don't look as good as they did five months ago. Because the circumstances alter between the months, it's hard to compare the two 15 months predictions against each other.
Rolling forecasting: This year plus next year (dynamic length)
This is the method Planacy recommends. Rolling forecast with this year plus next year means that, instead of forecasting a fixed couple of months ahead (for example, rolling 15), the prognosis is set between 13-24 months ahead. In other words, this year, and the following year.
The method is based on our observations of what works and doesn't. Some of our customers initially chose classic rolling forecasting with a fixed monthly perspective. Still, most of them later changed their minds and started working with a rolling forecast with dynamic length. This is one of the most significant advantages of Planacy; it’s easy to switch in which way you work.
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Pros
- It's possible that you, in January, put more effort into the budget and forecast for the first year since it's the closest 11 months. After that, you put less effort into the next year and use the predictive models for qualitative suggestions. The closer you get to the end of the year, the more you'll focus on the upcoming year at the same pace that you fill in the outcome for the first year. This method gives a long forecast horizon. You can also compare the forecast year-over-year without having a problem with different seasons.
- After every month close a new month is opened for forecasting. In Planacy, you can create algorithms and predictive forecasting suggestions, such as increased revenue and costs based on historical data from previous years. This way, you can work more effectively with rolling forecasting and include for example seasonal effects.
Cons
- This method can be less effective for companies with very rapid organic- or acquisition led growth. Since these companies' numbers tend to change significantly during a brief period, this year + next year's forecasts could sometimes be redundant.
To change method
Many who start working with rolling forecasting want to do more frequent forecasting, for example, monthly instead of quarterly. As previously mentioned, in Planacy, it's very easy to switch the forecasting method. Changing the method only takes a couple of minutes. For example, if we want the template to show 15 months instead of 12 months, we only need to adjust the end period setting for the template.
Unlike in many other systems, our customers can switch methods back and forth. If, for example, the customer wants to work with a classic budget and forecast during a period, and then change back to working rolling 18 months, this is possible. It's also possible to work rolling or dynamic with frequent forecasts and, at the same time, also work with a classic budget process for the upcoming year.
