What is Rolling Forecast?
Rolling forecast is a financial modeling tool used by management which helps the organization in continuously forecasting its state of affairs over a set time horizon; for example, if it is prepared for a period of twelve months rolling period, it takes into consideration next twelve months for forecast as soon as the actual data of one month is finalized.
#1 – Time Frame
Any business while preparing a rolling forecast model must decide whether they want to update the forecast data weekly, monthly or quarterly, as analyzing the actual results with forecast and then updating the next period forecast is a time consuming and daunting task. In most cases, this is prepared over a period of twelve months.
#2 – Drivers
The forecast must include the drivers and not just the numbers of total revenue or expenses. Let us understand this by an example – if a Car making company wants to do a rolling forecast of its revenue. It must include the quantity and sales price of the model, which is selling most and creating maximum revenue.
So next time, when there is an increase in Revenue, it should be able to explain whether the increase is due to an increase in selling price or extra quantities sold. Similarly, if there is a decrease in revenue, it should explain whether the decrease is due to discounts offered or fewer quantities sold.
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#3 – Variance Analysis
After the books of accounts are prepared for a month, the results must be compared with forecasted numbers, and depending on the outcome of variance analysis; appropriate changes should be made in the next period forecast. For example – if a Telecom company has forecasted that it has to pay a tower rental fee of $25,000 each month and because of integration and recent acquisition, it has stopped taking services from that tower. This $25,000 should be excluded from the next month’s forecasted expenses.
#4 – Data Source
When the forecast is prepared, the data source must be free from bias and should be included after an in-depth analysis because the bonuses of senior leadership are tied to their department performance so a biased leader might provide a very conservative number for forecast and then exceed the forecasted figures in actual results, which will lead to unethical practices. Also, the forecasted numbers must not come from someone who does not understand the complete process and might give some forecasted figures impossible to achieve.
#5 – Objectives & Senior Management
The rolling forecast model involves a lot of analysis and frequent changes in the forecasted numbers and quick decision making. This model definitely needs the support of its senior management for successful implementation, and it should be aligned with organizational objectives.
Rolling Forecast Example
You can download this Rolling Forecast Excel Template here – Rolling Forecast Excel Template
- Please consider the below tables in a continuation that shows the numbers for the period January 2019 to March 2020. If we believe that X Ltd. has prepared a rolling forecast for a twelve months period, then initially X Ltd. will prepare forecast data for Jan – Dec 2019 period.
- As soon as the financial reports are ready for Jan 2019, it should be compared with forecasted data and variances should be taken into consideration for future periods inputs.
- After Jan 2019 actual results, the table will show the forecast numbers for Feb 2019 to Jan 2020 period. Similarly, once the actual numbers for Feb and March 2019 are out, the rolling forecast model shows the forecast of Mar19 to Feb20 after Feb results and forecast of Apr19 to Mar20 after Mar19 results.
For detailed calculations, please refer to this excel sheet.
- It takes monthly changes into consideration which is essential for risk assessment
- Helpful to senior leadership in decision making
- It helps in setting up a proper Financial Planning & Analysis team
- Highlights the key factors and changes on a monthly basis
- Does not create pressure of preparing the complete yearly forecast after the year-end, as the next 12 months forecast numbers are always available
- It keeps track of essential drivers which are critical to the success of any organization
- It is a time-consuming process
- Many organizations find it challenging to implement
- Frequent changes are challenging to process period over period
Points to Note
Nowadays, with the development of a computerized accounting system, it is easy and quick to prepare the rolling forecast numbers and books of accounts as all the departments are interlinked through ERP – Enterprise Resource Planning systems. An organization must always monitor and analyze the rolling forecast numbers with actual financial results to implement any changes. Also, the simulation process should be run with the maximum variable to understand the impact of changes in one variable on final numbers.
Rolling forecast, according to one survey, is still being used by only 42 % of the organization, and rest are again using static forecast method, which is prepared once a year, and no frequent changes are made. So, we understand here that the implementation and preparation of such a model is a tough task. However, at the same time, it as its own exclusive advantages, which are an essential part of any business entity in today’s cut-throat competition where information is passing at light speed and correct decision at the right time can do wonders. So, an organization after a careful analysis should move to a rolling forecast model from a static one.
This has been a guide to What is Rolling Forecast and its Meaning. Here we discuss the example of Rolling forecast along with components, advantages, and disadvantages. You can learn more about budgeting from the following articles –