There are several different methods for budgeting and forecasting and it’s not always easy to know which one’s the best. All of the methods have their 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 macroeconomic factors such as the pandemic, war and inflation forces companies to adjust their budgets and forecasts more frequently as the outside world changes.
In this article, we cover the following forecasting methods:
We will also go over the pros and cons with the different methods and which method we usually recommend, and why.
The most common method used by most companies (Download TSOCFP for more data) is still the traditional one: 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 major 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 of course makes it difficult to predict and plan for the company's future financial situation. This is a big reason as to 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 limitation with a traditional budget and forecast that often affects larger companies is the classic budget effect where managers strive to spend their remaining 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 make the cost side more effiecient and save money if 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 it often goes hand in hand since you have to systemise and automise the financial planning so it doesn’t become too time-consuming.
Many of our customers chose Planacy partly because they wanted to extend their forecast horizon, make more frequent forecast updates and work with rolling forecasts. Being able to quickly make adjustments and adapt to the current reality is something which has become increasingly important in recent years due to the pandemic, war, inflation and rapid currency changes.
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 with financial planning.
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 always keep this in mind.
This is the method we recommend at Planacy: Rolling forecast with dynamic length – this year, plus the next. Instead of forecasting a fixed number of months, for example 15, the forecast is set between 13-24 months. Always the current year, plus the next year.
This method isn’t very common. In the beginning of 2023, it was used by about every fourth company in Sweden (according to TSOCFP), so 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 because of the obvious advantages. This is also one of the major strengths 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 both fixed years and quarters. You can also compare past years without having to worry about seasonality. You can add outcome data from past months, which is a lot better.
After every month, outcome data is added which enables you to make forecast adjustments for the same month next year. In Planacy you can then also choose to set up an automatic forecast proposal, for example based on historical growth during each month. In this way, you can streamline the rolling forecast, and it’s also easier to 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.
With Planacy you can streamline your work with data-driven processes and work more frequently with your forecast. The platform is customizable for your specific processes and unique business logic. Of course, you can work according to the forecasting method you prefer, though there are a lot of advantages with a longer forecasting horizon when you have a system that can automate large parts of the process. The most important thing is to challenge and constantly evolve your own process to optimize a more value-creating work with financial planning.
As mentioned earlier, it’s also very easy to reset and change your method for creating forecasts in Planacy. This is technically possible since we gather all of the outcome data and adjust which data should be shown using an intelligent time-filter. If we want to show 15 months in the template instead of 12 months, we simply need to adjust the time-filter – which only takes a couple of minutes.
Because of this, you can easily switch method back and forth in Planacy as you wish. 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. Or work with a combination of different methods.
We hope you found this article helpful and informative. You can read more about forecasting in Planacy here and you’re more than welcome to get in touch with us if you have any questions.
*The State of Corporate Financial Planning is an annual report published by Planacy. The report is based on a survey with multiple Swedish companies from various industries.
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