Rolling forecasts are especially useful in periods of uncertainty. They remind FP&A to look further out so that it is not running the risk of taking a myopic view. This allows FP&A to play a leading role in strategic decision-making by providing management with a wide range of prognostications based on market conditions.
ROLLING FORECAST ADVANTAGES
As Philip Peck, vice president of the Peloton Group, explained in in AFP’s FP&A Guide to Implementing a Rolling Forecast, standard annual forecasts put too much emphasis on the near-term planning horizon, meaning that quarterly or year-end targets that appease external stakeholders take priority over longer-term considerations. “This mindset also often limits the attention directed toward constantly exploring, understanding, and creating action plans around future competitive risks and opportunities,” he said. It also hides volatility by not providing insight to the period right after the end of the fiscal year, even if it is close at hand.
Nevine White, VP Accounting at Hargray Communications Group, explained that when she served as vice president of FP&A for TW Telecom, the company regularly spent about $400 million per year in construction costs. But it had no way of knowing year-to-year where its customers were going to be geographically. To resolve the situation, White and her FP&A team switched to a rolling forecast to estimate the movement of customers, and therefore where to implement the long-term capital expenditures. Given the rather unique problem that her company was facing, a rolling forecast helped TW shift its focus to where the resource was needed.
“In the context of the benefits you reap for flexibility, for making people actually, truly manage and making them empowered and accountable—it’s just such an uplift for an organization,” White said. “And that shows up in the results. I mean, the organization that I worked in, after we switched to rolling forecasts—and I will not claim, ever, that that was the only reason—but we had 40 consecutive quarters of top-line revenue growth. And that’s pretty remarkable in any industry. So, yes, there’s definitely a benefit to be reaped in that much more of a dynamic methodology.”
COMMON FORECASTING MISTAKES
Implementing a rolling forecast is a major shift for a company, and FP&A professionals who attempt to do so should expect to be met with some resistance.
Additionally, FP&A professionals should also realize that they will likely have to go through an adjustment period of their own when implementing these practices. Steve Player, managing director of The Player Group, identified some major mistakes that FP&A professionals tend to make when forecasting.
Forecasting “to the wall”: Many organizations make the mistake of forecasting to the end of the year. By using a consistent, rolling horizon, you avoid myopia.
Confusing forecasts with targets: Forecasting isn’t about hitting the target, but many FP&A professionals have trouble grasping this concept. It’s a much better practice to project a likely case and reflect risks. The point here is that forecasts need to be free from managers trying to cover up for their shortcomings by showing that they are meeting targets, rather than honestly representing the direction of the company.
Demanding forecast accuracy: Forecast accuracy is nigh impossible in a volatile world, and we are living in one. Instead, strive for forecast reliability. Again, all forecasts are at least partially wrong, and if you insist on accuracy, you are going to incent people to add conservatism rather than get an honest assessment, and miss volatility.
Relying on Excel spreadsheets: FP&A needs to be able to quickly ingest information and produce updated models; Excel is error prone, often slow to ingest data processes, and lacks the large-scale collaboration available in dedicated planning systems.
Going into excessive detail: There may be 100 drivers that can influence your forecast. But to include all of them would mean excessive data gathering with little time spent on the actual analysis. Instead, focus on five to 20 key drivers that will allow you much more time to do your analysis.
Defaulting to an assumption of a growth forecast: Don’t automatically assume things are going to improve. We have an implicit bias that our efforts will be successful, and that can create a blind spot to volatility. Watch and do your best to understand industry trends.
Treating forecasting as a “special event”: Forecasting should no longer be seen as a big event that only occurs every 12 months, 18 months, 36 months, etc. Forecasting should be an ongoing part of monitoring the business.
Only using one horizon: Many FP&A teams use one-time horizon for all forecasts with the same interval. Instead of making them all the same, use different horizons for different decisions, but integrate the system.
Failing to learn from your forecast record: Since all forecasts are wrong, there will be plenty of mistakes you make along the way. Learn from them and make adjustments. A good forecast should overestimate as much as it underestimates. Otherwise there is bias.
If you can overcome the challenges, reforecasting and rolling forecasts can be a boon to the organization. But the process is typically a multiyear project that requires a cultural upheaval in the organization. Some companies will actually run a parallel process for a while to help everyone ease into it, while others, like White’s company, just decided to rip the Band-Aid off quickly. “I think organizations need to figure out what that timeline looks like based on their culture, their market dynamics, and what really works for them,” she said. “But it’s not a one-year project. This is a multiyear, intense investment in your culture, your organization, your performance and everything that goes with that.”
For more insights, download the AFP Guide to Planning in the Age of Volatility, underwritten by Workiva, which examines the effects that uncertainty can have on the planning function.