Raise your hand if you’re looking forward to your annual budget process this year. Obviously, I can’t see who has their hand up and who doesn’t. But I’m willing to bet that very few, if any, of you read that first line and thought, “Oh yeah, I can’t wait!” The yearly process of asking for the moon and getting back a lump of green cheese eats up a significant amount of a business’ productive time and can often have a negative impact on morale in many departments. Nevertheless, it’s unreasonable to think that any business can function effectively without an accurate forecast of the revenue and expenses expected in the months and years ahead. Many companies have turned to a more flexible and less onerous approach, the rolling forecast.
A rolling forecast predicts a company’s performance over a specific period of time, typically 12, 18 or 24 months, based on the needs of the company. As each month comes to an end, another month is added to the rolling forecast so that managers always have a consistent forecast period. Monthly forecasting consumes less time and resources and allows companies to make small tweaks throughout the year for such things as changes in the market or the company’s industry. Unlike the annual budget with its specific end point, rolling forecasts provide solid data projections for the forecast period whenever important business decisions arise.
Annual budget problems addressed by a rolling forecast:
- Annual budget process consumes too much time and resources: Some businesses spend up to 6 months trying to assemble and finalize an annual budget. In some cases, because the numbers are only addressed once a year, departments may need to reconstruct how they estimated an amount in prior years. When a department head leaves, the new manager lacks much of the institutional knowledge that went into preparing the budget.
- The annual budget is fixed for the year: The more rigid structure of an annual budget locks in numbers for the budget period and doesn’t allow for significant adjustments. Companies that spend months preparing an annual budget can find that some new technology or process has come along to make the numbers obsolete before they are even finalized.
The rolling forecast and performance incentives
One issue that can become more complicated with rolling forecasts is incentive compensation. With an annual budget, cost centers push for larger budget amounts in order to make it easier to meet efficiency incentives and come in under budget. Revenue producers push for lower projections in order to make growth targets more easily obtainable. These biases still exist with a rolling forecast, but there’s an additional concern that the adjusted projections of a rolling forecast will create a moving target that no one can reliably shoot for.
To solve this, incentive targets can be based on key industry metrics of top performing companies. The goals still need to be clear and reasonably attainable for those who get incentive pay. They typically need to be fixed at the beginning of a period and not modified significantly, so that employees know what they need to do and when they need to have it done by. Targets like these can remove some of the typical politics from the budget process and focus people on the overall success of the company in the marketplace, rather than the success of their departments against internal targets.
A rolling forecast may not make sense for every business. They tend to help most in fast-paced industries where executives need to quickly make decisions that can have significant long-term impact. The rolling forecast provides data for a consistent forecast period no matter what month it is. If an executive needs to make a decision based on projected revenues and expenses 12 months from now, that person may not have the information necessary if the company is in month 8 of a 12-month annual budget.
To learn more about whether a rolling forecast could be an important upgrade for your business, please contact your HORNE engagement team.
For weekly insights into enterprise, please sign up here: