Rolling Forecasts Provide Flexibility In Uncertain Times

Forecasting how your company is likely to perform over the next year can be challenging, especially
when it’s unclear where the markets are heading. But accurate forecasts are critical when managing
a business. For example, they may be used to order inventory, hire additional workers, apply for
loans and credit lines, and evaluate investment alternatives.

Static vs. rolling forecasts

Traditional static (or fixed) forecasts are created at the start of the fiscal year — often based on the
company’s historical financial statements — and then used as a guide for the following year. This
approach works well for established organizations that experience relatively minor changes year to
year. But for most businesses, static forecasts quickly become outdated, because they don’t allow
adjustments throughout the year for variances that inevitably take place. The traditional approach is
based on inflexible assumptions that must be completely recast if conditions change.

Managers who use static forecasts typically see the forecasting process as a once-a-year exercise.
Many fail to compare expected to actual performance until year end. And those who notice when
actual results fall short may fail to revise their annual goals — instead hoping to make up for the
shortcoming before year end, leading to counterproductive behaviors.

For example, to make up for missed sales goals through the year, salespeople may resort to
aggressive discounting at year end, which can erode profits. In other situations, after a particularly
successful month, workers may decide to slack off in the subsequent month, because they’re ahead
of schedule.

Conversely, rolling forecasts require regular updates based on what’s actually happening in your
business and marketplace. This approach makes the forecasting process more adaptable, accurate
and meaningful.

How it works - Rather than leaving a budget in place for the year, companies with rolling budgets set times
throughout the year to readjust the numbers. For example, you might budget four quarters ahead. At
the end of each quarter, you would update the budgets for the next three quarters and add a new
fourth quarter.

The rolling approach encourages management to take an agile, forward-looking perspective. It
facilitates timely responses to emerging trends, whether on the revenue side, the expense side or
both. It also calls for regular budget monitoring and real-time review. These steps can help
management catch significant variances and make appropriate adjustments.
On a roll

Uncertainty abounds today. Some businesses have seen a major decline in revenue during the
pandemic but are hopeful that conditions will improve. Others have revised their strategies to take
advantage of emerging opportunities. Many are struggling to manage supply chain issues, labor
shortages and rising costs that could outlast the pandemic. Regardless of which challenges you’re
facing, rolling forecasts can be a helpful management tool.