Highlights
- A rolling forecast is a continually updated financial model that can facilitate a company’s financial decision making.
- This type of forecasting can help improve risk analysis and financial planning, allow you to budget more accurately, and help you prepare for investor meetings.
- Rolling forecasts require dependable data, clear goals, sensible timeframes, and many comparisons.
What is a rolling forecast?
A rolling forecast is a model or report that takes into account historical and real-time data in order to predict financial performance. It isn’t static—this financial model is continually updated to give the most accurate and useful information for financial decision making.
Generally, business forecasting is a projection of a business’s future developments based on trends, patterns, and data analysis. But a rolling forecast is updated more frequently to better respond to current events.
A rolling forecast can take into account:
- Historical data
- Existing budgets
- Year-to-date performance
- Market conditions
- Industry changes
- New regulations
- Customer trends
- And more
Benefits of creating a rolling forecast
Because it requires more maintenance, a rolling forecast can create more work for the teams involved. But the benefits are often worth the extra effort.
A rolling forecast allows you to:
- Improve risk analysis
- Improve financial planning
- Budget more accurately
- Prepare for investor meetings
Improve risk analysis
Smart businesses are always looking for ways to mitigate risk, and understanding different risks is an important part of that process. Rolling forecasts allow companies to adapt to changing conditions, which helps reduce overall risk.
Improve financial planning
Rolling forecasts allow you to respond quickly to changing regulations and marketplace conditions—instead of waiting until the next fiscal year to update your static plan.
Budget more accurately
Static budgets don’t allow for flexibility in the face of changing conditions. However, when rolling forecasts are considered, a budget can be adapted to fit current needs. This allows you to reallocate resources and make the most of your cash flow.
Prepare for investor meetings
When all of your metrics are up to date, you’ll be more confident sharing your business performance with outside investors. And because you’re checking in on your model on a regular basis, you’ll be more prepared for investor questions.
Best practices for a rolling forecast
If you’re going to use a rolling forecast, be sure to follow these guidelines:
- Use dependable sources of data
- Create clear goals
- Set a reasonable time frame
- Make sensible comparisons
- Use dependable sources of data
Use dependable sources of data
Your forecast is only as reliable as your data. Manual data entry can lead to human error, which can cause problems in your forecast. Software that helps automate financial documents, such as expense reports, can be a big help in this department.
Create clear goals
What do you want to accomplish, and what is driving that objective? Get everyone on the same page, and make sure your forecast is geared towards finding the information you actually need.
Set a reasonable time frame
Depending on the size of your business and the nature of your industry, you may need to think in terms of longer or shorter projections. Do you need to project one month or year into the future, or more? Do you need a new forecast every month, or every quarter? Consider not just your business needs, but also the bandwidth of your finance team.
Make the right comparisons
You can contrast each year with previous years, but also performance during each individual quarter or month. You also need to compare your forecast to actual results to see if you’re hitting the mark.
Rolling forecast example
Take a look at this hypothetical example of a rolling forecast.
Let’s say the figures in the chart below are for a small stationary company. The actual results are in for January and February; this means they should be compared with both the forecasted numbers and the results for January and February of previous years to help improve future predictions.
January (Actual):
- Sales: $6,000
- Expenses: $3,000
- Taxes: $1,000
- Net profit: $2,000
February (Actual):
- Sales: $6,100
- Expenses: $3,000
- Taxes: $1, 025
- Net profit: $2,075
March (Forecast):
- Sales: $6,200
- Expenses: $3,100
- Taxes: $1,050
- Net profit: $2,050
April (Forecast):
- Sales: $6,300
- Expenses: $3,100
- Taxes: $1,075
- Net profit: $2,125
May (Forecast):
- Sales: $6,400
- Expenses: $3,200
- Taxes: $1,100
- Net profit: $2,100
June (Forecast):
- Sales: $6,500
- Expenses: $3,200
- Taxes: $1,125
- Net profit: $2,175
If the stationary company is updating their rolling forecast every month, then now is the time to extend the forecast into July. By doing this, they stay ahead of the results and can plan for several months into the future.
This forecast is helpful, because it gives an idea of the growth this business can likely expect in the coming months. And because it is updated monthly, it can be flexible in case there is a sudden spike in stationary demand in March. A monthly update also helps keep the forecasting reasonable, reliable, and able to be adapted to real-world conditions.
How to create a rolling forecast
Follow these steps to get started creating your own rolling forecast.
1. Choose clear goals
What do you want to predict in your rolling forecast? Our guide to business forecasting can help you learn about the possible directions you could choose. If your entire team understands the objectives, it’s easier to achieve them.
2. Set a time frame
How far into the future do you want your forecast to go? Once you determine this analysis period, you also need to decide on increments—will you update your forecast weekly, monthly, or quarterly? The more frequent your updates, the more time you’ll spend on forecasting.
3. Decide who will be involved
Choose the teams or individuals who will be responsible for creating these forecasts or providing information for their creation. This will allow them to be accountable for their contributions.
4. Create scenarios
If you run various possible scenarios, you’ll be able to determine how your company would adapt to them if they become reality. This advance planning will allow you to be proactive about potential changes. You can run scenarios assuming standard performance, superior performance, and sub-par performance. This way, you’ll be more prepared for any possibility.
5. Track the forecast
As your rolling forecast is implemented, continually compare your goals to your actual outcomes. If there are discrepancies, it’s time to track down the cause and make sure it doesn’t keep happening.
A rolling forecast should enable your company to achieve its financial goals, but many companies are hesitant to adopt it because of the extra work involved—or because they fear change. However, it’s worth evaluating the potential benefits and deciding if this approach is a good fit for your business.
Ready to simplify expense management? Try BILL today.
