Effective financial management: How rolling forecast contributes to business growth

Change is almost the only constant, and it imposes high demands – especially on your planning and budgeting process. This is, however, where the financial planning method of rolling forecast can help you. And this article brings you insights about how rolling forecasts – combined with the right financial performance goals – can support business growth better than traditional planning processes.

Traditionally, the classic annual budget process has been used to try to predict the company’s future performance and, consequently, its success – or possible lack hereof. Normally, a budget process consists in consolidating budgets from various business departments and subsequent meetings for adjustments – until the management is satisfied. Usually, this process is not particularly satisfying for anyone.

And in a world undergoing constant change, it may seem almost comical to ask anyone to look one year ahead and provide a clear answer about a company’s exact development.

It is, after all, a difficult (almost impossible) task since any idea about the future is based upon a wealth of assumptions about events that may affect the result: political initiatives or a lack hereof, the bankruptcy of customers or suppliers, changes in strategy, an invaded country, or a key employee resigning.

That’s why it’s important to spend your time where it provides the most value when trying to look into the future. That is where rolling forecasting may help you.

The implementation of rolling forecasts not only releases resources from a time-consuming budget process. It also forces you to consider the development of your business by continuously looking forward rather than focusing on a fixed budget period, thereby directing attention to what provides value for the company.

Rolling forecast means that you will continuously look 12-24 months ahead. Which period makes most sense depends on your business model. However, the longer you get away from the current month, the more uncertain the prediction will be. Consequently, it would be an advantage to spend more time on the months that are closest in time and less time on the months that are well into the future.

Furthermore, rolling forecasting will help you keep your process simple as you concentrate on a few selected key parameters, enabling you to react to changes as time goes by. Thus, you can focus on activities that have a direct impact on the development and growth of your company. This makes the overall focus change from explanations of budgetary deviations to expectations of the future.

The ongoing forecasting process also gives you a good basis for preparing a budget for the board or investors when requested – even at short notice.

In this way, you can ensure a strict focus on what is important in supporting the strategy of your business, be more realistic with regards to predictions about the company’s development, and bring about a strategic approach to your company’s financial planning and management.

An advantage of rolling forecasting is that this process is better at supporting your focus on the right indicators for measuring the growth and value of your business.

Basically, your company is successful if it performs better than its competitors measured in market shares or profitability. Or if the shareholders’ return on investment is better than it would otherwise have been in the market.

That’s why a good indicator is, for example, the return on invested capital (ROIC) because it equalises differences in the capital structures as regards both equity capital and growth and, thus, you can compare the returns with the weighted average cost of capital (WACC). In this way, you can show investors that you bring a better return than they can, in average, get in the market.

Another overall indicator is that your focus is on growing more than the market rather than on a specific percentage rate, which is the case in many companies that use a classic budget process. This indicator shows whether the business is successful despite a difficult market or whether the business actually performs poorly though it grows fairly.

To make your business succeed better than the market, you must consider which indicators are real value drivers. Which indicators are the right ones to use depends on both your business model and the industry – but what is common is the need for comparing yourselves with relevant competitors.

When combining the right indicators with rolling forecasting, you focus on scenario analyses rather than estimate a fully accurate number. That is a natural consequence of the future being probabilistic rather than an exact figure. And the purpose of rolling forecasting is to manage the parameters or scenarios that have the greatest impact on the variables affecting the outcome.

Excel is still the daily workhorse in most finance and economy departments and, therefore, many analyses and forecasts are prepared using Excel. But it may be challenging to make a realistic analysis by means of Excel because the complexity will increase rather fast, the risk of errors is high, and transparency is low.

Therefore, it may be an advantage to find a system that can support rolling forecast and associated processes. That’s where modern planning systems enter the picture.

Because modern planning systems make it easier to collaborate across the organisation and allow you to make rolling forecasting. In this way, you can, in a fast and agile way, adjust different elements as your assumptions change.

Actually, modern planning systems support both traditional budget processes, rolling forecasting, scenario analyses, reporting, and strategic planning. They even integrate artificial intelligence for better forecasting and machine learning for automation of manual tasks.

Read this and more articles (in Danish) in our magazine Content here.