Rolling forecasts are best budgeting tools
For years, the traditional budget has been the tried and tested way to financially operate a business.
Many companies spent countless hours and meetings fine-tuning details and projects, and peering in the crystal ball to see what the next year might hold. The result of this time and hard work was a static document, many times rendered next to useless as soon as the first unanticipated business event occurred.
This uncertainty as the business now moves forward without a relevant financial roadmap deters it from either capitalizing on opportunities or navigating through tough times. Often this lack of direction leads to poor management decisions such as overspending or underutilizing assets.
To combat this scenario many companies have turned away from the traditional budgeting process and begun to utilize forward rolling forecasts. These rolling forecasts are living documents that allow businesses to use past monthly or quarterly results as well as immediate future expectations to adjust budgeted revenues and expenses. Rolling forecasts never become stale or useless because they are constantly changing. I’ll use three points to convince you that your business should do away with the traditional budget and embrace a new way of financial planning with a rolling forecast.
Rolling forecasts create financial agility. Competition across numerous markets seems to be greater now than ever. Businesses are being forced to innovate and act quickly on opportunities as well as mitigate threats from new or growing competitors. Rolling forecasts are superior to traditional budgets in that they allow management to quickly update revenue and spending estimates based on the latest development in their business. Maybe a major R&D effort needs to be made to fix a product or offering. Or a big contract is landed that may need some initial upfront resources. Management needs to see how these circumstances affect the business with updated real-time reporting that a rolling forecast can provide.
Rolling forecasts increase team collaboration. The traditional budget model has been to meet, set the budget, and then hope all is well before meeting again in a year or so. However, a rolling forecast requires the management team to meet on a consistent basis to be able to effectively update the forecast. Again, these meetings may be monthly, or quarterly, depending on the company and the amount of change in business operations at any given time. Ultimately, the fluid nature and better financial visibility provided by the forecast will lead team members to understand how decreased spending or increased revenue in one division of the business may be able to supplement something in another manager’s division.
Rolling forecasts ensure that the budget is being used. I’ve already addressed the stagnant nature of the traditional budget model. It’s painful to think that important time spent by incredibly smart team members may be wasted on a budget that could be obsolete as soon as it is finished. A proper rolling forecast will always be usable no matter what the case.
Focusing efforts on more useful information should be a goal for all companies. A rolling forecast could prove to be the financial tool that adds more value than you could imagine.