The second meeting of the Geneva Financial Planning and Analysis (FP&A) Club on October 8 focused on rolling forecasts. FP&A professionals from organizations in Geneva and the surrounding areas were presented with key factors to ensure successful implementation of these tools.
The concept of a rolling forecast is a hot topic in FP&A at the moment. Many companies attempt to implement it, but not all of them are successful. Statistics show that 20% of the organizations that have implemented rolling forecasts recently have abandoned them, because they proved to be more complex than initially expected. Additionally, they haven’t found enough value in this tool to continue using it.
However, a rolling forecast can be a powerful tool for FP&A if used correctly. Attendees of the Geneva club looked at the seven factors for success.
- Culture: The starting point for successful rolling forecast is an organizations’ business culture. Successful implementation requires support from top management, and acceptance by key participants. All parties must understand that a rolling forecast is not a measurement, but is a management tool. It should not follow accounting structures.
- People: The next crucial factor for a successful rolling forecast is people. Talent in FP&A in particular is important for individuals working with a rolling forecast. They should be good communicators with analytical skills who can see the “big picture” and possess the ability to build models.
- Models and systems: Fully 80% of all organizations continue to use Excel for FP&A. Attempting to do a rolling forecast for a multimillion or multibillion dollar company in Excel is almost impossible. Models and systems are essential. Models should be driver-based, to make it easier to plan different scenarios and forecast quickly. Systems should be flexible and tailored to FP&A. Many companies attempt to do this in Excel, but Excel is prone to mistakes and can be one of the reasons why a rolling forecast is unsuccessful.
- Process: Processes should be quick, flexible and allow for collaboration, while minimizing non-value adding activities. This takes time, effort and education; a company I was previously with could not improve its process because the operational calendar was created three years earlier. Standardization and modern systems can help improve processes; it is up to FP&A to make sure these are implemented.
- Design: It is important to understand the level of detail needed in a rolling forecast. It should be timely, and should allow for action. The forecast should contain the minimum amount of data to understand what drives the future. Only forecasts that are based on drivers and assumptions are actionable. We should not use conventional accounting data structures because they do not say why and, therefore are not actionable.
- Alignment: Typically, companies have three planning processes: strategic planning, where everything begins; business planning, where most FP&A people are working; and operation planning, which provides input to the business plan. Alignment and communication between these different planning processes is vital for a successful rolling forecast.
- Participation: The forecasting process involves so many different people; both financial and nonfinancial. It is up to FP&A practitioners to be business partners and teach nonfinancial people what drivers and systems to use. There is a gap between strategy and execution at many organizations; involving many departments in the planning process can help to overcome this problem. However, while participation is important, FP&A professionals must also make sure that the process does not become too crowded.
Drawbacks and Challenges
Of course, there are drawbacks to using a rolling forecast. Preparation process can be costly and time-consuming if they are not automated, since a forecast is reviewed and updated several times per year and is too complex for accountants without sufficient training. Constant forecasting throughout the year can also lead to an increase in managers' workload. Coordination of profit centers can decrease due to the lack of one common budget. Lastly, performance evaluation will be more difficult to carry out.
Rolling Forecasting vs. Budgeting
Many studies present rolling forecasts as the main alternative to budgets. Beyond Budgeting propagators view budgets as static, cumbersome and time-consuming and creating little value for an organization. Alternatively, rolling forecasts and a combination of other performance management tools are said to improve the performance management process.
However, even with rolling forecasting, most companies are unlikely to eliminate the budget altogether. Budgets are often required by external agencies and financial institutions. They may also be required for target setting and performance bonuses. One approach is just to nominate one rolling forecast, which covers the required periods, to be called the budget. For example, the rolling 18-month forecast produced in November will include the whole of the following year, and the relevant periods could be copied to create the budget for the following year. This may be subject to additional review and approval steps, but would not require the investment in time that was previously dedicated to the standalone budget process.
The next meeting of the Geneva FP&A Club is set to take place on 14 January 2015. More information on the FP&A certification is available here.
For further insights into FP&A, be sure to sign up for the AFP FP&A e-newsletter or visit the FP&A website. To contact the FP&A Club about free membership for finance professionals, or for details on forthcoming international events, please email Larysa Melnychuk or join the LinkedIn FP&A Group. An FP&A conference is also scheduled for 19-20 May 2015 in Amsterdam, Netherlands. Those interested in speaking should contact Larysa Melnychuk.