What is a Rolling Forecast?
A Rolling Forecast is the most effective approach to budgeting and forecasting for most businesses. In general, creating an Annual Budget takes a considerable amount of effort. If this budget is then out of date (due to economic or environmental changes) and therefore useless 45-90 days after its completion, the value of this annual exercise is questionable. However, if you create a Rolling Forecast you will always have an accurate view of at least 12 months of forecasted financials.
A Rolling Forecast is the process of creating a budget and forecast beyond the next fiscal year, or normal Annual Budget period of 12 months. This can be as little as 13 months or as much as several years. The idea is to always have at least 12 months of forecasted data in addition to actual data through the most recently completed actual month. This can be accomplished by starting with a 24 month forecast – the first twelve of which is your Annual Budget, and the rest is a forecast that you will use as the basis for your Rolling Forecast. Then on a regular basis, usually monthly, you update your Rolling Forecast with the most recent actual month’s data and then review the remaining forecast in order to “tune” it and keep it as accurate as possible. This creates your Rolling Forecast.
By reviewing and tuning your Rolling Forecast regularly, you will adjust it for the latest economic an environmental impacts. Also, this regular exercise spreads the overall effort of budgeting and forecasting out over time. This minimizes the time consumed on the Annual Budget process by reducing it to a review and tuning effort. When the Annual Budget time draws near, you simply take the next fiscal year from your Rolling Forecast, extend it out a month or more, and you have a great starting point for your next Annual Budget that is accurate, due to your monthly tuning. Then once your Annual Budget is approved, you use it as the basis for your next Rolling Forecast and repeat the process, always maintaining at least 12 months of forecasted data.
Another huge benefit to a Rolling Forecast is that it keeps the planners (whether they are full time planners or department Managers) in touch with the data, and therefore the forecast. This makes the analysis of why expectations were not met or hopefully exceeded a regular by-product of the process. And that is the real reason we budget and forecast – to understand where our business is headed and why; and to understand what needs adjusting if our business is not headed in the desired direction.