In today's dynamic business environment, relying solely on a static annual budget can leave your SME vulnerable to unforeseen changes and missed opportunities. A rolling forecast offers a more agile and responsive approach to financial planning. Instead of a fixed 12-month period, a rolling forecast continuously updates, typically monthly or quarterly, by adding a new period to the end as the oldest period rolls off. This provides a consistent forward-looking view, allowing you to adapt your strategies and resource allocation in real-time.
Understanding the Benefits of a Rolling Forecast
Enhanced Agility: Quickly adapt to changing market conditions, customer behavior, and internal performance.
Improved Accuracy: Shorter forecast horizons tend to be more accurate than long-term annual projections.
Continuous Planning: Financial planning becomes an ongoing process, integrated into your regular business operations.
Better Resource Allocation: Make more informed decisions about investments, hiring, and spending based on the latest projections.
Proactive Risk Management: Identify potential challenges earlier and implement mitigation strategies.
More Relevant KPIs: Track performance against a continuously updated benchmark, providing more relevant insights.
Improved Communication: Facilitates more frequent and relevant financial discussions across teams.
Key Steps to Setting Up Your Rolling Forecast
Define Your Forecasting Horizon and Frequency
Horizon: Determine how far into the future you will forecast (e.g., 12, 18, or 24 months). A 12-month rolling forecast is common, providing a year-long outlook at any point in time.
Frequency: Decide how often you will update your forecast (e.g., monthly or quarterly). Monthly updates offer greater agility but require more frequent effort. Quarterly updates strike a balance between responsiveness and efficiency.
Choose Your Forecasting Tool
Spreadsheet Software (e.g., Excel, Google Sheets): Suitable for smaller SMEs with less complex operations. Requires careful design and maintenance of formulas and links.
Financial Planning and Analysis (FP&A) Software: Offers more robust features for data integration, scenario planning, collaboration, and automated updates, ideal for growing SMEs.
Business Intelligence (BI) Platforms: Can be used to build sophisticated forecasting models by leveraging data from various sources.
Establish Your Baseline Data
Gather historical financial data (at least 12-24 months) for key revenue and expense drivers.
Integrate data from your accounting system, CRM, and other relevant operational systems.
Ensure the accuracy and reliability of your baseline data.
Identify Key Revenue and Cost Drivers
Understand the factors that most significantly impact your revenue (e.g., sales volume, pricing, customer acquisition, seasonality).
Identify your key cost drivers (e.g., cost of goods sold, marketing spend, salaries, operational overhead).
Develop Forecasting Methodologies
Top-Down: Start with overall market trends and then break down to your company's expected performance.
Bottom-Up: Build your forecast by aggregating individual sales projections, departmental expenses, and operational plans.
Driver-Based: Forecast key revenue and cost items based on specific operational drivers (e.g., sales based on lead generation and conversion rates).
For a rolling forecast, a driver-based or bottom-up approach often provides more granular and adaptable projections.
Assign Responsibility and Collaboration
Clearly define who is responsible for contributing to and reviewing different parts of the forecast (e.g., sales team for revenue projections, department heads for expense budgets).
Establish a collaborative process for sharing assumptions and insights across teams.
Set Up Your Rolling Mechanism
Design your forecasting model to automatically roll forward by one period (month or quarter) after each actual period closes.
Ensure that actual results are automatically integrated into the model to update the baseline for future projections.
Plan for a review and adjustment process each time the forecast rolls over.
Document Your Assumptions
Clearly document all the key assumptions underlying your projections (e.g., sales growth rates, pricing changes, marketing campaign effectiveness, planned investments).
Regularly review and update these assumptions based on the latest information.
Implement a Review and Adjustment Process
Schedule regular meetings (e.g., monthly or quarterly) to review the latest forecast against actual results.
Analyze variances and understand the reasons behind them.
Adjust your assumptions and future projections based on new information and insights.
Scenario Planning
Integrate scenario planning into your rolling forecast process. Create best-case, worst-case, and most likely scenarios by adjusting key assumptions to understand potential risks and opportunities.
Transitioning from Annual Budgeting to Rolling Forecasts
Start Small: Begin with a rolling forecast for a key area of your business (e.g., sales) and gradually expand its scope.
Educate Your Team: Ensure everyone understands the purpose and benefits of a rolling forecast.
Iterate and Refine: Your rolling forecast process will likely evolve over time as you gain experience and identify areas for improvement.
Don't Abandon Budgeting Entirely: A rolling forecast can complement your annual budget by providing a more dynamic and frequently updated perspective. The annual budget can still serve as a high-level strategic roadmap.
By implementing a well-structured rolling forecast, your SME can move beyond the limitations of static annual planning and embrace a more agile, responsive, and ultimately more effective approach to financial management. This will empower you to navigate changing conditions with greater confidence and drive sustainable growth.
Mike Torello
CFO,LOREM IPSUM CORPORATION