The purpose of this article is to explore what consequences and costs a move to rolling forecasting has for the other actors involved in the process.
Why is rolling forecast relevant?
The traditional approach to once a year annual planning supplemented by a number of in-year re-forecasts has come under increasing criticism. Part of the frustration comes from the input side around the time consumed to create plans. This might even be acceptable if the value generated would be meaningful. But this is increasingly not the case.
Business is now requiring better and quicker feedback. Also, the fixed mindset that comes with fixed internal targets stands directly in the way of the cultural shift required to foster more flexibility, agility and risk-taking in the organization.
Rolling forecasting promises to address some of these issues.
What are the key considerations?
A rolling forecast is DIFFERENT from a traditional forecast in that:
- The future time period stays the same for every forecast.
- It is not tied to a financial target that is linked to any incentives.
A rolling forecast MAY or MAY NOT be different from a traditional forecast in:
- The level of details involved.
- The extent of cross-organization collaboration.
- The balance between financial versus operational drivers.
The focus of a forecast is to show a realistic picture of where the organization is now and can expect to be in the future period and how that deviates from any budgeted targets and commitments made to external stakeholders.
The focus of a ROLLING forecast goes beyond this by casting the beam beyond any arbitrary cut-off date.
A rolling forecast is a management tool that is used to help decision making around resources and priorities. Therefore, the forecast is also by definition by and for the business.
The role of FP&A is around process leadership which tackles the following elements:
- Process design balancing cost and value (as simple as necessary – EFFICIENCY)
- Process governance (involvement of the right people at the right time for the right decision – ENGAGEMENT)
- Process quality (quality of outputs meeting expectations – EFFECTIVENESS)
Areas of risk and concerns
- Transparency: A rolling forecast demands a greater level of transparency on a more consistent basis. It drives greater accountability for the plans. For those responsible for the business areas involved this can lead to some discomfort.
- Time requirements: The elements of balancing a medium-term outlook does require more time spent on the managerial tasks of risk management and strategic decision making. This can be at the expense of the time dealing with operational issues.
- Same wine in a new bottle: If the rolling forecast is seen as just another tool mandated by the finance department and it fundamentally does not change the direction and quality of the performance discussion and decision making, then it will remain an immense source of frustration.
Mitigating the risks
A rolling forecast is a tool like any other. It needs to be used at the right time for the right purpose.
Dealing with the issues that increased transparency may lead to any passive resistance is a leadership imperative, not just a finance one. A culture of transparency for the sake of learning needs to be embedded as opposed to a focus on measuring forecasting performance for the sake of blaming.
To make sure rolling forecasts are driving a qualitatively and quantitatively different discussion, the leadership team has to set the tone and expectations clearly. The CFO needs to play a very important role here.
Financial planning and analysis (FP&A) can really address misgivings in balancing the inputs versus the outputs. Going back to their leadership of the process design, FP&A has to think deeply about the right design choices for a rolling forecast and manage the communication and transition for the business.
Can technology play a role in the solution space?
The use of algorithms to generate statistical baseline forecasts has improved dramatically. In-memory computing, data visualization tools, predictive analytics are all developments which can definitely reduce the time taken to generate forecasts whilst generating more robust forecasts.
One watch out: doing these requires deep organizational integration – in order to avoid the “black box” trap. It requires an investment in not just advanced analytic capabilities but the basic plumbing of data management as well as the integration of the human intelligence aspect from the business perspective. This is a significant change management challenge.
In this article I have tried to show that whilst rolling forecasts have clear benefits, any successful implementation of it needs to recognize the same causes of resistance to more traditional forecasting and even budgeting.
In essence, these are social and organizational challenges not technical ones. Until some of these organizational challenges are sufficiently addressed, the impact of rolling forecasts will still be limited.
The article was first published in Unit 4 Prevero Blog