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Tearing Down the Wall with Rolling Forecasts

Many businesses spend months preparing budgets and annual plans which typically become obsolete even before the new financial year has started, usually because market conditions and planning assumptions have changed.

Fixed forecasts are essentially updates to the annual budget as a company moves through the new financial year. Such a process is sometimes called “forecasting to the wall” – with each reforecast being for a shorter period with the financial year-end as a hard stop or “the wall”.

If a company reforecasts quarterly, the first reforecast looks 9 months into the future, the second quarterly forecast looks 6 months into the future and the third quarterly forecast looks three months into the future.

Forecasting to the wall makes it difficult to quantify and take longer term planning decisions based on latest market trends and insights. And there is a tendency to use outdated historical data to predict the future.

By contrast, rolling forecasts cover a chosen time horizon into the future, for example, four months, one year or even eighteen months. Rather than a fixed forecast of diminishing periods, a 12-month rolling forecast always looks at the next 12 months. A continuous planning approach inculcates a forward-looking mindset, enabling businesses to properly plan the future and not simply analyze, and possible repeat the mistakes of, the past.

Whilst rolling forecasts should feed into a more effective budget process, they do not generally follow the same line-by-line approach as a budget. A rolling forecast focuses on the dimensions that most drive performance. These could include demand, supply chain, price, volume, product launches, headcount shortage, changes in market conditions. A rolling forecast also allows new strategic initiatives to be incorporated and tracked with immediacy rather than having to wait for the next budget cycle to come around.

Continuous planning and rolling forecasts are even more important during times of high uncertainty and volatile trading, such as the one we currently find ourselves in as the Covid-19 pandemic plays out.

On the bright side, putting the right processes in place now should reap meaningful rewards once the present situation improves.


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