Opportunities (and problems) With Rolling Forecast
Methods for Forecasting
There are several different methods for budgeting and forecasting and it’s not always easy to know which one is the best. All of the methods have pros and cons and which one you should choose might vary based on your business and industry.
A global challenge for all companies in today's society is the changing world we live in, where digitalization has played a key role in forcing companies to adjust their budgets and forecasts more frequently as the outside world changes.
Below, we list the different methods for forecasting as well as the pros and cons for each of them.
Traditional Budget and Forecast
The most common method used by most companies is creating a budget for next year in the fall and then making forecast adjustments monthly, quarterly or every six months.
Using this method and creating a solid budget during the fall can be very beneficial since all of the people involved in the process usually sets aside time for this. To then forecast a couple of times over the year works well if you for example follow-up on the same period, for example quarterly.
A disadvantage of this method is that you tend to never look further than the budget year. Thus, the fall forecast only allows you to look a couple of months ahead, which is a big reason why a lot of companies choose to switch to rolling forecasts. With rolling forecasts you usually look at least a year into the future, no matter which month of the year you’re currently in.
Another con with a traditional budget and forecast is the classic budget effect where managers burn their budget at the end of the year, so they won’t get a smaller budget the year after. It’s obviously hard for companies to save money when people think like this.
A lot of the companies that start working with rolling forecasts often do this because they want to create more frequent forecasts, for example monthly forecasts instead of quarterly. This is not actually something which is related directly to rolling forecasts since you can make monthly updates in a traditional budget and forecast too – but often times it goes hand in hand.
Rolling Forecast: 12–18 Months
Many of our customers chose us because they wanted to start working with rolling forecasts, make more frequent forecast updates and look further ahead. Being able to quickly make adjustments and adapt to changes in the world is something which is highly relevant today since Covid 19 has had a major impact on the world. One can assume that a lot of company’s budgets aren’t particularly relevant anymore.
You can create rolling forecasts in several different ways and with different forecast horizons. You either update quarterly or monthly. A common phrase you hear a lot these days is “Rolling 12”, which indicates that you have a rolling forecast with 12 months as a horizon.
Creating rolling forecasts helps companies to look further ahead – not only the next business year. Working with rolling-12 is efficient since you update the same month next year based on the month you just closed, which gives your forecast better precision. Particularly if you have reoccurring similarities in the monthly fluctuations.
More and more companies are choosing to work with rolling forecasts that look even further ahead than 12 months, for example 15 or 16 months. One advantage of choosing this method is that you get a better outlook: in September you get the next year’s budget “for free” which enables you to save a lot of time in the budget process and streamline your work.
One limitation with the traditional rolling forecast is that you only get a forecast up until the same month next year if you have a 12-month timeframe, maybe one or two months more if you have a longer timeframe. This means that you cannot make comparisons between the years, which limits the analysis. Also, most people in an organization tend to think in calendar year, such as salespeople who often think and plan for what they need to sell in a year – not in 15 months.
Another drawback with rolling forecasts of 12–18 months is managing seasonality. Even if you can get a more precise forecast for seasonality with the help of rolling forecasts it can be problematic to do comparisons between the years.
Take a fitness & health center as an example. Say they have a rolling forecast with a 15-month timeframe. By the end of the year they will have two months of January included in their forecast. And what to people to in January? They’ve made a New Year resolution to start working out and they get a gym membership. Then in April, you only have one month of January included in the forecast and you can’t compare the different 15-month timeframes. There’s no fixed point here since the sales can differentiate significantly depending on the month. The person responsible for the forecast must the always keep this in mind.
Rolling Forecast: This Year + the Next (dynamic)
This is the method we recommend at Planacy: This year, plus the next. It’s a rolling forecast with dynamic length. Instead of forecasting a fixed number of months, for example 15, the forecast is set between 13-24 months. Always the current year, plus next year.
Relatively few companies have yet thought of this method – probably because you need a bit of trial and error since this method is based on what we’ve seen works, and what doesn’t work. Some of our customers have initially chosen to work with regular rolling forecasts with fixed monthly perspectives, but the majority of them have changed their minds later on and switched to dynamic rolling forecasts instead. This is also one of the major advantages of Planacy – it’s very easy to change the way you work.
If you’re in, say January, you might focus more on the first year since it’s the first 11 months, then you create the forecast for next year with a little less precision. The closer you get to the end of the year, the more you’ll focus on next year as you fill in outcomes from the first year. This method is unbeatable since you get a long timeframe and all of the advantages of always looking at years. You can also compare past years without having to worry about seasonality. You can add outcome data from the past months, which is a lot better.
After every month, outcome data is added, but at the same time a new month opens up for forecasting. In Planacy you can then also choose to set up a forecast proposal, for example an increase of 3% compared to last year. This way, you can streamline the rolling forecast, but also include seasonal effects.
This method may be less effective for companies that have a high growth and expand considerably through acquisition. Since the numbers of these companies tend to change in a very short period of time, a rolling forecast with dynamic timeframe can be superfluous.
Illustration of the Different Methods
As mentioned earlier, in Planacy it’s very easy to reset and change your method for creating forecasts. This is technically possible since we gather all of the outcome data and adjust which data should be shown using a time-filter. If we want to show 15 months in the template instead of 12 months, we only need to adjust the time-filter – which only takes a couple of minutes.
Because of this, you can switch method back and forth in Planacy as you wish, which sets us apart from our competitors. This means that it’s possible to, for example, go back to a traditional budget and forecast during a certain period, and then later return to a rolling forecast again.