Finance forecasting: 5 rolling forecast best practices
Finance forecasting is relatively straightforward. It’s all about developing the best estimates of your business’s future financial outcome. It’s not rocket science, but it requires as much due diligence and care.
In our previous article we gave three reasons why using Excel for forecasting may not be a good idea for your business. According to some, financial forecasting is considered to be static. In fact, most argue that businesses need to be able to “peer into the future with greater insight” to respond to threats and opportunities in their market if they really want to thrive.
Enter rolling forecasts.
A rolling forecast is a financial report compiled from historical data and used to predict future financial performance over a period of time.
Should you replace your finance forecasting method with rolling forecasts?
Rolling forecasts help you see a bigger, more accurate picture. They allow you to keep tabs on each and every financial result as and when they take place. This level of insight further enables your business to respond to market conditions faster, thereby making your organisation more agile and competitive.
In this article, we’ll share 5 finance forecasting best practice for incorporating rolling forecasts. These best practices will give you a greater understanding of what it takes to adopt rolling forecasts and the positive impact they could have on your business.
1. Use the Right Tools
Finance teams usually turn to Excel for forecasting. But that may not be sound business practice. Excel allows companies the ability to complete a variety of tasks. It also holds them back from greater productivity gains and exposes firms to security risks.
Excel, while the workhorse for many finance teams, cannot perform rolling forecasts without falling prey to errors and crashing.
Rolling forecast require more than just one iteration. Once baseline forecasts are developed, businesses need to perform additional analysis to track and understand the impact of changes to their plans and account for a variety of influences.
The smarter, more strategic approach is to deploy an enterprise performance management (EPM) solution. Unlike Excel, EPM software is robust and built to make light work of large data processing tasks, including rolling forecasts and planning and accommodating your companies management and measurement requirements.
2. Establish Your Objectives
Businesses have different objectives, all of which are dependent on what a business is experiencing and the course of action best prescribed for an ideal future outcome.
As rolling forecasts are used to determine potential future outcomes, you’ll need to establish which areas of your plan need greater detail to be able to create forecasts.
You could build a forecast based on acquisitions and how to support them as part of a larger strategic growth plan. You could also choose to focus on a more efficient inventory management approach or plan for when cash will be available by accounting for cash borrowings and lines of credit.
3. Determine Your Forecast Duration
Forecasting can be a little tricky. Questions around the duration of a forecast and whether you should account for additional months or forecast out by 2 years come to mind.
Keep your forecast and business cycle aligned, but add a minimum of a quarter to your forecast. This eliminates confusion for preparers who would see an additional month in your forecast and consider it as a new period altogether.
4. Identify Comparison Periods
Choosing and analysing your comparison periods requires a degree of delicacy. Comparison periods include not just your forecasts but also actual outcomes for the current and prior year.
As you run comparisons, ensure that you include actuals and forecasts according to the same time frames (12/15/18 month forecast windows), and include the prior year.
5. Analyse Revenue, Expenses and Related Drivers
A unique characteristic of rolling forecasts is that they are best designed when based on the drivers that influence your business.
For example, the number of sales units would have a direct impact on production, just as the cost of materials and labour will affect product pricing.
Arriving at accurate forecasts, therefore, becomes a practice in accounting for drivers that consistently influence your results, and doing away with those that are proven to be inconsistent influencers.
Rolling forecasts have the power to transform your business. As a tool, they can help you derive more accurate information to better plan and manage your business’s growth. They also position your business as a more competitive entity due to the agility gained through accurate forecasting.
Ready to start forecasting like a pro?
Learn how to spot the challenges that come with legacy processes and tech, and how to empower your finance team to achieve more.
Our next article shares with you why your business needs EPM software.