Rolling Forecasts are Critical Part of Company Financial Management Tools

Progressive financial management enables business leaders to view business finance and operations through a set of strong binoculars versus a rear-view mirror. In addition to the static annual budget, it is becoming imperative for companies to integrate rolling forecasts as a critical tool for managing business operations.

Many recognizable large companies have completely discarded their budgeting process as and replacing with rolling forecasts or flexible budgets and event-driven planning. Given the increasingly continuous changing and uncertain business environment that we all compete in, which is marked by volatility in financial markets, restricted credit, rapid commodity price changes, etc., businesses are adopting more flexible means to make sound business decisions. Converting or combining a static budgeting process into a dynamic continuous forecast brings many advantages.

Skilled CFOs assist companies to improve their ability to manage the future rather than dwelling on the past. Their ability to help managers to prepare quality forecasts is a core competence. Accurate and meaningful forecasting is more art than science and only highly skilled and creative CFOs truly perform this function well. Most management teams make the mistake of assuming that forecasts are about predicting and controlling future outcomes. The purpose of forecasting is to inform decision making (to help shape future outcomes), not to predict the future. In reality, forecasting is necessary only because businesses typically cannot react instantly to changing events. That’s why fast reaction is more important than (even accurate) prediction—because exact accuracy is rarely achieved.

To be useful, forecasts should tell managers something about the trajectory they are on compared with their medium-term goals and thus whether further action is necessary. That means they are concerned with constantly “managing gaps” rather than closing them. Medium-term goals are best viewed in terms of ranges of desired outcomes rather than specific targets. Rolling forecasts, if well prepared give senior management a continuous picture both of the current position and the short term outlook. In effect they are the aggregate of business as usual forecasts (extrapolations of existing trends), all the action plans in progress, and all plans in the pipeline. In other words, forecasts should be “baseline plus anticipated events,” with the effort being focused on “events.”

The only certainty about a forecast is that it will be wrong. The question is the amount of variability of the forecast compared with actual results/outcomes. Narrowing the variation of the forecast should be a continuous exercise. At a minimum conduct monthly post-mortems on forecasts. The purpose is not to attribute blame but to learn if forecast accuracy is improving and how it can be further improved. Forecasting inaccuracy can be seen in the same light as process variability; teams therefore need to better understand the causes of that variability and work to reduce them.

A CFO should always include business managers in the continuous process of preparing short term forecasts as a means to develop the absolute best forecasts and at the same time build a company culture of forward-thinking decision making. Adaptive and market leading organizations focus less on annual budgets or long-term views and more on rolling views—usually rolling forecasts that always look twelve to eighteen months ahead.

When performed properly forecasting becomes THE KEY financial management process. Exceptional forecasting skills come from learning, experience, decent information systems, and ultimately, judgment. A Harvest CFO will greatly enhance your company’s forecasting capabilities and as a result greatly enhance your company’s overall financial and operational performance.

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