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Strategy Vena

Rolling Forecasts In FP&A: A Progress Check


Sponsored by Vena

Experts have called for an end to static budgets for years, but it’s not as simple as it could be. Here are some of the latest – and oldest – considerations to help make rolling forecasts a reality.

Most people hear the phrase attributed to Syrus -- “a rolling stone gathers no moss” -- and know instantly what it means. To stay still means running the risk the world will continue growing while you stagnate. And stagnation is one thing finance departments can ill afford in 2019.

In March, for example, consulting firm The Hackett Group released its latest Finance Key Issues report, based on a survey of more than 150. While an overwhelming 91 percent said helping their organizations pursue digital transformation is either highly important or critical, they are well aware they are going to be chasing those goals with fewer resources. Survey respondents projected at least a 2 percent cut in finance staff and an operating budget reduction of 0.2 percent. This was the takeaway from the report’s authors:

“Finance leaders can triage their improvement projects by using three important criteria: Is the initiative aligned with the enterprise’s overall objectives? Does it reflect finance’s functional goals? Last, but perhaps the most critical prioritization factor, does finance currently have the relevant execution capacity. If it does not, it must quickly focus its efforts on narrowing or closing the difference between current and future requirements.”

No matter how they answer these questions, finance teams won’t be able to help the organization meet any of these objectives by producing a budget that stays untouched over the next four quarters. The agility of finance -- and a business in general -- depends on being able to take in additional information and respond accordingly with decisions and resources that provide a better foundation for future success. In other words, a rolling forecast.

An Evolution, Not an Event

The shift towards rolling forecasts has proven to be challenging for firms that don’t think through the implications. Research firm Gartner published a report that showed managers at over half (52 percent) of companies using rolling forecasting are dissatisfied — some even to the extent of abandoning it. This doesn’t mean we should stick with the status quo, Gartner added. It’s a matter of prioritizing what and when you update, planning for ongoing iterations and spending the bulk of your time actually analyzing your data.

One way to ease the pressure is to move away from an either/or scenario and begin creating rolling forecasts alongside the annual budget, suggests a rolling forecast best practice guide from Wall Street Prep.

By integrating tools like Excel with applications that have sophisticated workflow, modeling and database capabilities, the author suggests, rolling forecasts can serve as a complement to the annual budget, at least initially. That means FP&A teams can pay more attention to business drivers, rather than summary financials, and assess how and why they may be fluctuating. This clip sums it up well:

"The rolling forecast is a feedback loop, changing constantly based on real time data . . . drivers can be seen as the "joints" in a forecast — they allow it to flex and move as new conditions and restraints are introduced. In addition, driver-based forecasting may require fewer inputs than traditional forecasting and can help to automate and shorten planning cycles."

The Cost of Doing Nothing

A recent article on FP&A Trends walks through a real-life case study involving a company that has moved to rolling forecasts. Instead of simply offering up numbers, it points out the questions that inform what gets examined in a rolling forecast. These include what’s expected in terms of annual sales, whether a particular target will be hit, management’s short- and long-term expectations and, finally, how the business might evolve.

When you take all these elements together, you start to realize that rolling forecasts can be a vital exercise in simply learning what you don’t know. As the author puts it:

“Remember, a rolling forecast means continually reviewing the (non-)actions of the management team and adjust operations in accordance with the business focus.”

Back to the Future

As awareness around some of these approaches permeates the finance community, it may mean that more of the investments CFOs make in technology will have the payoff they expect.

Vena outlined some key advantages to software-as-a-service tools in finance in our whitepaper on rolling forecasts, and they’re worth recapping here:

Greater Processing Power (Even with Fewer Staff): If the Hackett Group is right and CFOs will have to do more with less, in-memory computing capabilities in many cloud products will allow them to process more data than if they had an army of people on their FP&A teams.

An Infinite Shelf Life: In the days of on-premise software, programs could be outdated nearly from the moment they were deployed. Cloud FP&A software is updated automatically, which means teams can benefit from new features and functionality in the same real-time way in which they need to monitor changes in key performance indicators.

Data Protection with Room to Grow: Annual budgets are among the most sensitive documents in any organization, and rolling forecasts will only increase the need to secure the critical information they contain. As more departments outside of FP&A feed into rolling forecasts, meanwhile, a cloud-based approach ensures you’ll be able to scale accordingly.

Summing Up

The business case for rolling forecasts can probably be summed up in two words: “Things change.”

Given the pace of competition in most markets today, waiting around until the next budget period to pivot is going to be a non-starter for many senior leadership teams and boards.

Rolling forecasts may not solve everything, but there’s pretty broad agreement about the benefits they provide. These include increased accuracy of the information leaders use to make decisions, an improved ability to mitigate potential risks and the clearest possible window in the short-term future where businesses can plot the best course.

Don’t be phased by a few stumbles along the way. With due planning and thoughtful execution, you’ll be on a roll before you know it. 

Check out Vena’s top 10 tips for moving from static budgets to rolling forecasts, and schedule a demo today.