You may also be interested in:


Market Volatility: Driving Interest in Rolling Forecasts

  • By Nilly Essaides
  • Published: 9/2/2015
budgetThe recent volatility in the stock and foreign exchange markets is a reminder for financial planning and analysis (FP&A) functions just how important it is to keep forecasting agile and look beyond the fiscal year. As rates shift, so do budget goals and forecasting objectives. It is imperative that FP&A groups adopt a more dynamic approach to their forecasting methodology.

For FP&A, a traditional annual forecast provides no means of adding substantive value to the conversation taking place at the strategic level of the organization. In contrast, a rolling forecast allows FP&A professionals to play a leading role in strategic discussions and communications by providing management with a range of possibilities that are dependent on shifting market conditions or the actions of competitors. The benefits they provide increase lead time for senior management, thus allowing them to make important decisions on how to allocate key resources in order to drive continued profitability.

Near-sighted view

Today, the typical financial forecast horizon still doesn’t extend beyond the current fiscal year, according to Philip Peck, vice president of the Peloton Group. “Emphasis on the near-term planning horizon, where decisions focus on meeting quarterly or year-end targets to satisfy external stakeholders, often outweighs longer-term considerations—including assessing the impact of how decisions today can positively or negatively impact longer-term performance,” he said. “This mindset also often limits the attention directed toward constantly exploring, understanding, and creating action plans around future competitive risks and opportunities.”

From an overall forecast purpose and philosophy perspective, there is often confusion between competing pressures to meet near-term budget targets versus providing accurate, high-quality forecast estimates. The question becomes: How do you balance management’s performance expectations with a realistic, pragmatic view of the future?

Although complex business environment demands a more agile, dynamic, continuous planning process, the methods, tools and processes most companies are relying on are no longer sufficient, noted Peck. “Most organizations still rely on the traditional budgeting process to support many business requirements and related planning activities, including target setting, detailed operational planning, cost control, resource allocation, capital spending, and incentive compensation,” he said. “Yet long gone are the days when a standard, rigid annual budgeting and planning process steered the business with only predictable and minimal budgeting changes throughout the calendar year.”

A shift in perception

Increasingly, senior management is looking to FP&A for answers that go beyond the fiscal year-end, and more companies are adopting a rolling forecast, explained EPM Transformation Associate Principal Sholape Kolawole of The Hackett Group.

A recent analysis of benchmarks performed by The Hackett Group showed that 33 percent of companies intend to implement a best practice rolling forecasting over the next few years. Another 22 percent are planning to implement a version of a forecast that extends beyond 12 months, which in essence is a form of a rolling forecast. “Combined, we see 55 percent of companies surveyed planning to shift to a rolling forecast,” Kolawole said. “Companies are realizing that there are a lot of benefits particularly in this environment of competitive pressure and fast-moving markets. They understand the value of seeing farther out.”

Mitch Max, partner at BetterVu, a performance and risk management practice consultancy, has observed a substantial amount of movement toward rolling forecasting in the past five years. While he’s been involved in Beyond Budgeting “from the get-go,” full implementation of the Beyond Budgeting framework has been very slow to catch on in North America, due to what Max describes as “an inherent resistance” to giving up on the budget.

“Rolling forecasting is a way to coexist with the budget that still allows for agility and change, while de-emphasizing the amount of effort that goes into creating the annual budget,” said Max. “The process is a little more pragmatic than the European ideals that spawned the Beyond Budgeting framework. I believe this will continue to evolve.”

Still, adopting a rolling forecast has its own challenges. “Realistically, most corporations look at the immediate calendar year and year-end target,” said Pras Chatterjee, senior director of product marketing for Enterprise Performance Management at SAP. “People don’t care about the rolling forecast. For the rolling forecast to affect business change, there needs to be a cultural shift. No amount of technology can resolve that.”

Navigate Revenue Uncertainty

Don’t let revenue uncertainty affect your business. AFP’s Top-Line Modeling workshop will teach you how to navigate seasonality and how to create an effective revenue model.

Register for this valuable pre-conference workshop today.

Copyright © 2019 Association for Financial Professionals, Inc.
All rights reserved.