At the core of any business's financial planning lie two key activities: forecasting and budgeting. Yet, the traditional methods used by many companies don't allow much flexibility to accommodate midstream changes to the underlying budget/forecast assumptions once they've been made.
Savvy business owners use a process known as rolling forecasting and budgeting, which allows for regular updating of forecasts and budgets based on the current state of your business. And that is critically important, as relying on inaccurate financial information can lead to faulty — and costly — business decisions.
Traditional forecasting and budgeting works like this: Department heads are asked to make spending and revenue projections for the coming year (often little more than educated guesses). Projections are cast in stone, and everyone is then held accountable for "hitting their numbers." Problems occur when the underlying assumptions behind these projections inevitably change throughout the year. The end result is an inflexible process that holds employees to unrealistic goals and quotas.
Revisit and Realign
The idea behind rolling forecasting and budgeting is straightforward: Instead of locking in to a static annual budget that can't be modified, you create a more pliant one that can be easily amended throughout the year. Key business drivers are then forecast on a continual basis based on the latest data and projections.
Of course, a rolling process requires critically evaluating forecasting and budgeting throughout the year — typically each quarter. New forecasts are made for the coming quarter based on actual results from the most recent quarter. Budget assumptions are then adjusted to reflect the new realities that are occurring in your business at this point in time.
A Better Way
In a rapidly changing and highly competitive economic environment, companies simply need a better way to predict the future. Rolling forecasting and budgeting can provide an array of potential benefits for business owners, including:
• Financial information that is current and accurate
• Projections that entail less guesswork and more certainty
• Greater flexibility to adapt to business and marketplace changes
• Elimination of wasteful "use it or lose it" budgeting and
• Better overall business decision making
Making the Switch
The transition from a traditional annual forecasting and budgeting process entails some key steps, not the least of which is a focus on consistency. You'll need to update your forecasts and budgets using the same interval (e.g., quarterly), and use the same budgeting/forecasting processes and tools each time.
Access to accurate and timely data will also be key, so be prepared to tweak your internal reporting systems — or create new systems altogether. Software programs can help automate the forecasting process. For example, rolling forecast applications can be used to create and manage different scenarios.