As the business environment has become increasingly fast-paced, the old-school approach of traditional budgeting is showing evident signs of fatigue. While the approach can still work for household accounts, traditional or annual budgeting no longer cut it for agile organizations. What many are instead moving to is rolling forecast and this article will explain the main reason why your business should make this move as well.
What is Rolling Forecast?
Rolling forecast is a dynamic approach to business planning and budgeting and has often shown to be more capable to adapt to the ever-changing and unknown environments than traditional or annual budgeting can.
The difference between the two lies in the fact that, whereas traditional budgeting requires you to create a static budget and manage your business throughout the year based on that, rolling forecast takes a more adaptive and flexible approach.
With rolling forecast, a business can revisit and update their budgeting assumptions not just once per year like in traditional budgeting, but throughout the year. As a result, rolling forecast allows companies to better foresee the changes in their industry, market, business or economy, allocate resources as needed and adapt their plans accordingly.
Rolling forecast is not a completely new approach to forecasting and budgeting and according to the enterprise performance management director at The Hackett Group Miles Buntin, about 60% of world-class companies already use it. However, that doesn’t mean that rolling forecast is widely adopted. One survey by Hosting Analytics found that 75% of businesses still rely largely on Excel spreadsheets for their budgeting process.
Top 5 Reasons to Transition from Traditional Budgeting to Rolling Forecast:
The silver lining, however, is that the majority of surveyed expressed willingness to switch to rolling forecast in the next year or two.
In more ways than one, rolling forecast is showing clear advantages over traditional budgeting, with just one of them being the fact that rolling forecast is 4x as likely to be able to respond quickly to market changes, according to FSN – Future of Planning, Budgeting and Forecasting Survey 2017.
There are a number of reasons to make this transition and many can be specific to the industry or even the business itself, but we’ll focus on the main 5 that are more global.
1. Traditional budgeting can no longer cope with the dynamic world around us.
We already mentioned that rolling forecast is better able to adapt to the dynamic and oft-turbulent environment than a traditional budgeting can.
The old budgeting approach is simply too slow for the data-driven world we are living in and a more agile and flexible approach like rolling forecast is needed.
2. Relies on data and not gut-feeling
Perhaps in the old days, when the industry and market changed very little over time, business owners and executives could rely on their instinct and gut-feeling.
Today, however, business decisions need to be much more data-driven and retrieved from as many sources as necessary in order for the right decisions to be made. This is the approach rolling forecast takes.
3. Rolling forecast is better able to mitigate risks
Traditional budgeting is largely a set-it-and-forget-it approach. Once the budget is set at the end of one year, it hardly ever changes until the end of the next one. Again, because of the rapidly changing world around us, this approach no longer suffice and because of it, traditional budgeting is rather susceptible to different risks.
Rolling forecast instead can help largely mitigate those risks by supporting “what if” scenarios that allow decision makers to take a more proactive approach and reduce their risk exposure.
4. It can give more fresh insights
As rolling forecast is able to give more relevant and fresh insights than traditional budgeting, both in regards to the external and the internal environment, it is better able to drive performance and align the organization’s strategic goals and objectives.
5. Traditional budgeting is much less accurate
By the time it is completed, traditional budgeting is often no longer accurate and is irrelevant. Organizations spend more time explaining the deviation versus an inaccurate budget then getting fresh insights.
However, because you can make quick adjustments and tweaks with rolling forecast, this means that this method is much more accurate and ready to change.
In the Let It Roll – Why More Companies are Abandoning Budgets in Favor of Rolling Forecasts article, by CFO’s Russ Banham, North American program director at the Beyond Budgeting Roundtable Steve Player says:
“It makes no sense to use a 19th century tool to manage a 21st century company in a volatile global economy.”
That’s an excellent point and one that many CFO’s should think about, so we’ll leave you with that to think about.
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