Financial Data
Updated 26 Feb 2020

Ditch the annual budget

The traditional annual budget process is not only outdated, but also a bad business practice in a volatile environment. Here’s why the rolling forecast is essential to business success today.

13 July 2012  Share  0 comments  Print

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What if the petrol price shoots up overnight? What if the summer rains wreak havoc on your supply chain? What if your customer suddenly wants more product from you that your start-up can possibly produce?

It should come as no big surprise that the volatility of the markets and the speed at which things happen today require businesses to be agile and flexible. That makes forecasting a critical tool, especially for entrepreneurs who need to stay quick on their feet, and able to adapt their businesses to the ebb and flow of a constantly changing marketplace.

The rolling forecast gives entrepreneurs the ability to plan and respond to wherever the business goes and however fast it gets there, which is why it makes more sense for business than the annual budget.

It enables business owners to plan as little as 90 days ahead, and amend their plans along the way, much like the captain of a ship who will chart a course, but who will have to make certain changes along the way, in line with unpredictable weather conditions. It’s all about continuous planning and more immediate and responsive financial plans.

Setting the business free

Jack Welch, the former CEO of General Electric, wrote that budgeting brings out the most unproductive behaviours in an organisation. One of the ways in which organisations do that is to tie incentive pay to their budgets. The result: this creates a conflict of interest among employees who are more committed to achieving targets than to moving the company forward.

Rolling forecasts, by contrast, set the business loose from the restrictions imposed by annual budgets. By establishing goals and priorities in three-, four- or six-month increments, a rolling forecast can provide business owners with a more up-to-date financial picture.

Rolling forecasts are also useful because they continually extend the formal planning horizon out more than a year rather than having it stop abruptly at the end of a company’s financial year. They can be the right first step in improving the effectiveness of the budgeting process.

Here are three reasons why:

  1. It forces people to think proactively about what can go wrong and what can go right
  2. It doesn't lock business owners in to a plan. Instead, it allows you to be flexible and adaptive, just what you need in world where things often turn outr differently from what we plan
  3. It keeps everybody focused on how to optimise the business, rather than achieving a pre-determined figure.

How to implement a rolling forecast

Rolling forecasts are not simply periodic updates against the annual budget and are not associated with a specific financial year.

A rolling forecast continually predicts performance against key business drivers. This allows the business to better identify risks and opportunities, revisit strategy in the light of new business scenarios and regularly align resources and activities for competitive advantage.

Here are three steps to implement rolling forecasts:

1. Make it driver-based.

Forecasting should focus on specific metrics by identifying business drivers that are relevant for analysis and decision-making. This will do away with data overload and provide alignment and control over forecasting.

2. Link the forecast to strategic and operational decisions.

Risks and opportunities identified during a rolling forecast should trigger “what-if” analyses and scenario planning. Resources for capital projects and operational expenses can then be reallocated and new performance targets set.

3. Ensure direct ownership and involvement of budget planners.

For a rolling forecast to succeed as a reality check, everyone involved in budgeting should be pulled in to provide unbiased data.

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