We’ve talked before about using rolling forecasts, noting that they “facilitate more informed decision-making in areas such as pricing, product mix, capital allocations, and organizational staffing levels.” But are rolling forecasts a new idea? Hardly. Rolling forecasts are a well-established best practice in performance management. In fact, the value of the process has been recognized by innovative companies for more than a decade.
In one of the foundational books on modern performance management, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, authors Jeremy Hope and Robin Fraser outline at length the principles behind rolling forecasts. They offer numerous case studies in how managing with a continually refreshed planning cycle can alter the culture of management for the better.1
Aberdeen endorses rolling forecasts
Now, a new knowledge brief from the Aberdeen Group identifies more of the benefits of rolling forecasts and offers recommendations for how an organization can implement them to best effect. In You Can’t Afford to be Static: Rolling with the Punches in Forecasting, Aberdeen research analysts observe that rolling forecasts can:
- Give decision makers insight into the dynamics affecting revenue and expense
- Enable decision makers to “better judge the impact any decision will have on the bottom line”
- Improve the accuracy of forecasted and budgeted revenue by roughly 14%
- Improve operational speed and performance
- Enable companies to continually optimize the flow of discretionary investments
To gain these benefits, Aberdeen says that forecasts must draw on information from outside the walls of the organization. It’s now “glaringly apparent,” they say, that organizations must consider “external changes within their industry and aberrations in the overall economy” if they are to execute their business strategies successfully. In addition, Aberdeen recommends that organizations integrate financial and non-financial data, continually evaluate business drivers, and put forecasting at the center of the management process.
Speed in rolling forecasts: necessary, but not sufficient
Timeliness of information is vital to the success of rolling forecasts. Aberdeen, however, points out that speed is only one of the advantages. “The value of a rolling forecast is not simply in being able to understand your financials in real time,” they explain. The greater benefit comes from the insight that rolling forecasts provide into the relationships between finance and operations. “The significance of a rolling forecast is that it gives decision makers insight into the dynamics of revenue and expense, and their related drivers.”
Rolling forecasts enable a “well-oiled machine”
What happens when all that timely information informs a faster process? Ideally, it enables the organization to run like the proverbial well-oiled machine. Hope and Fraser give one example taken from a global car manufacturer.
“One forecast dovetails into another like cogs in a wheel. These forecasts form the core information for the monthly meetings, the development programs, and the strategy reviews. Managers build competence in sketching the future, and within that future lie the opportunities and threats that traditional budget-driven processes fail to see until it’s too late.” 2
Suffice it to say that rolling forecasts have great potential and a great business pedigree. Like any process change that affects institutional culture, adoption is likely to be gradual. But the results are worth it. Read the Aberdeen knowledge brief, You Can’t Afford to be Static: Rolling with the Punches in Forecasting, to learn why this is one proven best practice that you shouldn’t postpone adopting.
Then watch our on-demand webinar, Embracing Continuous Planning: Time to Move from Annual Budgets to Rolling Forecasts, featuring Jim Collins, Performance Management Strategy Executive at IBM, and Guy Jones, Global Technical Sales Leader, Data Science and Business Analytics for IBM, to hear how rolling forecasts and continuous planning provide insight into the dynamics of revenues and expenses.
1 Jeremy Hope, Robin Fraser, Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap, Harvard Business School Press, 2003.