Rolling Forecasts: Seven Factors for Success
The concept of a rolling forecast is a hot topic in FP&A at the moment. Many companies attempt to implement it, but not all of them are successful. Statistics suggest that one in five of the organisations that implemented rolling forecasts recently have since abandoned them, because they proved to be more complex than initially expected. Additionally, they didn’t find enough value in this tool to continue using it.
However, a rolling forecast can be a powerful tool for FP&A if used correctly. Attendees of the Geneva club looked at the seven factors for success.
Drawbacks and Challenges
Naturally there are drawbacks to using a rolling forecast. The preparation process can be costly and time-consuming if they are not automated, since a forecast is reviewed and updated several times per year and is too complex for accountants without sufficient training. Constant forecasting throughout the year can also lead to an increase in managers’ workload. Coordination of profit centres can decrease due to the lack of one common budget. Lastly, performance evaluation will be more difficult to carry out.
Rolling Forecasting vs. Budgeting
Many studies present rolling forecasts as the main alternative to budgets. Beyond budgeting propagators view budgets as static, cumbersome and time-consuming; creating little value for an organisation. Alternatively, rolling forecasts and a combination of other performance management tools are said to improve the performance management process.
However, even with rolling forecasting, most companies are unlikely to eliminate the budget altogether. Budgets are often required by external agencies and financial institutions. They may also be required for target setting and performance bonuses. One approach is just to nominate one rolling forecast, which covers the required periods, to be called the budget.
For example, the rolling 18-month forecast produced in November will include the whole of the following year, and the relevant periods could be copied to create the budget for the following year. This may be subject to additional review and approval steps, but would not require the investment in time that was previously dedicated to the standalone budget process.
The next meeting of the Geneva FP&A Club is set to take place on 14 January 2015. More information on the FP&A certification is available here.
For further insights into FP&A, be sure to sign up for the AFP FP&A e-newsletter or visit the FP&A website. To contact the FP&A Club about free membership for finance professionals, or for details on forthcoming international events, please email Larysa Melnychuk or join the LinkedIn FP&A Group. An FP&A conference is also scheduled for 19-20 May 2015 in Amsterdam, Netherlands. Those interested in speaking should contact Larysa Melnychuk.