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Strategy

In Today’s Volatile Economy, Rolling Forecasts Take the Guess out of Guesswork


by Ed Gromann

Rolling forecasts take the guess out of the guesswork that is part and parcel to business planning.

© JimVallee/iStock/Getty Images Plus

I speak to many CFOs who assure me that rolling forecasts aren’t necessary for their organizations. They update their plans when their actuals come in each month, which negates the need for full-blown forecasts every few months. I would agree, if it were possible to predict with 100% certainty what the future will look like. But we can’t. Not even the top economists can do that. 

Forecasts are a management team’s best guess of what lies ahead, the result of looking at last year’s trends and working with their division heads to see what’s in the pipeline. Predicting what will happen 12 or 18 months in advance is difficult in the best of cases, and nearly impossible when the market or a particular industry is experiencing uncertainty or volatility. Rolling forecasts allow you to assess your finances, monitor cash flow, evaluate key business drivers and adapt to changes in the market. In short, they take the guess out of the guesswork that is part and parcel to business planning. In my opinion, all business planners should do them, projecting four to six quarters ahead, irrespective of the calendar date or year.

Key Factors to Consider in Your Rolling Forecasts

Topping the list is agility. In a dynamic global economy, agility is key. Are sales of a particular product line moving faster than anticipated? If so, the company will want to pivot in order to capitalize on the opportunity. If they’re moving slower, what will be your plan? Do you need to deploy more of your sales force on another, fast-moving product line? What’s your plan for keeping those products in stock?

Agility requires hard data -- actual results -- to determine the company’s next best move. Rolling forecasts offer more agility because they allow the management team make decisions based on live numbers and not projections. 

Flexibility is also critical in a dynamic market. Businesses need to create synergy between the financial and operational sides of the organization so they reconcile their predictions with reality. Rolling financial forecasts -- fueled by recent numbers and trends -- allow managers to make decisions on a more operational level, which is inherently more flexible.

Continuous planning is always important, but even more so during times of economic flux. Fortunately, financial teams have access to a wide array of automation, and they would be wise to avail themselves of it and ditch spreadsheet-based plans once and for all. By definition, rolling forecasts require teams to set up a plan that is automated and capable of doing multiple robust what-if scenario plans. Automated what-if scenario planning allows teams to test multiple scenarios quickly and easily and assess their impact on the financial statements on a monthly basis. This will take the pain out of rolling forecasts.

Finally, a successful rolling forecast requires business leaders to identify their key business drivers, which admittedly, is the most difficult aspect. There are myriad internal and external factors that affect your financial performances. Some -- such as a decision to hire additional sales personnel or open a new office -- you have control over. But other factors, like cost of borrowing money or the price of oil, are beyond your control, and the best you can do is gauge ahead of time the impact they’ll have on your plan. 

Naturally, your list of key drivers is likely to be long, and that’s where the difficulty lies. Many CFOs tell me that their biggest challenge lies in identifying which KPIs will have the biggest material impact on business performance. Often, identifying the right KPIs means testing multiple factors of the plan and forecasting the results (the biggest reason why spreadsheets just aren’t up to business planning today). Testing multiple scenarios is well worth the effort, however. If you can identify the key drivers upfront, you will be in a position to spot opportunities and warning signs earlier, which in turn, gives you more time to execute your response.

We all know that business planning requires a good deal of predicting the future, but rolling forecasts can help you take the guess out of the guesswork by infusing your forecasts with up-to-date results and helping you to make smarter decisions for the quarter ahead.

Ed Gromann serves as CPO for Centage Corporation.