4 steps to implement rolling forecasts

By - April 20, 2016

Imagine a ship that sets course based on last month’s weather patterns. No matter what happens, the ship doesn’t deviate from the course. The conditions have changed drastically from last month, but the ship doesn’t alter its course, because the forecast predicted calm weather. So the ship sails right into a hurricane – and disaster.

A rolling forecast is aligned to business cycles rather than the fiscal year. Extend past the typical one-year planning horizon and forecast at least four to eight quarters past the current quarter’s actuals to really help senior management look at the future as well as proactively manage it.

Rolling forecasts offer a number of benefits and they enable agile responses to changing market conditions and help executives manage performance expectations. The optimize decision-making for better planning, and they ensure that business goals and related priorities and investment strategies are realistic because they are frequently evaluated and adjusted.

Let’s walk through four steps to implementing rolling forecasts:

    1. Use a dedicated application for rolling forecasts. Good rolling forecasts require multiple versions in order to model different scenarios, which are extremely difficult to update and manage with spreadsheets. They’re prone to errors, broken links and formulas, so Finance spends more time trouble-shooting spreadsheets than analyzing their contents.
    2.  Model your course on drivers, not details. Focus your rolling forecasts on significant business drivers such as risk, profit, and working capital. A flexible and customizable application will also let you reflect the specific drivers for your industry. For an energy company, profit drivers might include demand, refinery utilization, and volume. Working capital could be affected by headcount costs and pricing changes. Risk factors might include commodity price volatility and backlash against renewable subsidies. Rolling forecasts based on key business drivers are also less onerous than those based on masses of detail, so your managers will be more likely to engage in the process.The links between drivers are also important. Look for a system that gives you visibility into how your model’s drivers link to and affect each other and lets you create driver-based models that span departments. For example, since price is a driver for sales, changing a price will affect total sales, COGS, expenses, and more.
    3. Use rolling forecasts to sound out multiple, “what if,” scenarios. You should also be able to save unlimited versions of scenarios – such as your best case, worst case, 80% sales, etc. Modeling these what-if scenarios has an important benefit: organizations can use them to build contingency plans so they can react immediately when conditions change.
    4. Choose the right forecasting horizon for your industry. There’s no hard-and-fast guideline for the time interval included in a rolling forecast. It all depends on your industry, your business needs, and how long it takes to make decisions about operations, capacity and spending.

To learn more about how RSM can assist you with your other business needs, contact RSM’s management consulting professionals at 800.274.3978 or email us.

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