What is a Rolling Forecast?

Components

#1 – Time Frame

While preparing a rolling forecast model, any business must decide whether they want to update the forecast data weekly, monthly or quarterly, as analyzing the actual results with the forecast and then updating the next period forecast is a time-consuming and daunting task. In most cases, this is prepared over twelve months.

#2 – Drivers

The forecast must include the drivers and not just the numbers of total revenue or expenses. Let us understand this by an example – if a Car making company wants to do a rolling forecast of its revenue. It must include the quantity and sales price of the model, which is selling most and creating maximum revenue.

So next time, when there is an increase in revenue, it should be able to explain whether the increase is due to an increase in selling price or extra quantities sold. Similarly, if there is a decrease in revenue, it should explain whether the decrease is due to discounts offered or fewer quantities sold. 

#3 – Variance Analysis

After the books of accounts are prepared for a month, the results must be compared with forecasted numbers. Depending on the outcome of variance analysisVariance AnalysisVariance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more; appropriate changes should be made in the next period forecast. For example – if a Telecom company has forecasted that it has to pay a tower rental fee of $25,000 each month and because of integration and recent acquisition, it has stopped taking services from that tower. This $25,000 should be excluded from the next month’s forecasted expenses.

#4 – Data Source

The data source must be free from bias when the forecast is prepared. For example, it should be included after an in-depth analysis because the bonuses of senior leadership are tied to their department performance, so a biased leader might provide a very conservative number for the forecast and then exceed the forecasted figures in actual results, which will lead to unethical practices. Also, the forecasted numbers must not come from someone who does not understand the complete process and might make some forecasted figures impossible.

#5 – Objectives & Senior Management

The rolling forecast model involves a lot of analysis, frequent changes in the forecasted numbers, and quick decision-making. Therefore, this model needs the support of its senior management for successful implementation, and it should be aligned with organizational objectives.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Rolling Forecast (wallstreetmojo.com)

Rolling Forecast Example

You can download this Rolling Forecast Excel Template here – Rolling Forecast Excel Template

  • Please consider the below tables in a continuation that shows the numbers from January 2019 to March 2020. If we believe that X Ltd. has prepared a rolling forecast for twelve months, then X Ltd. will initially prepare forecast data for the Jan – Dec 2019 period.As soon as the financial reports are ready for Jan 2019, they should be compared with forecasted data, and variances should be considered for future periods inputs.After Jan 2019 actual results, the table will show the forecast numbers for Feb 2019 to Jan 2020 period. Similarly, once the actual numbers for Feb and March 2019 are out, the rolling forecast model shows the forecast of Mar19 to Feb20 after Feb results and the forecast of Apr19 to Mar20 after Mar19 results.

For detailed calculations, please refer to this excel sheet.

Advantages

  • It considers monthly changes, which are essential for risk assessment.Helpful to senior leadership in decision makingIt helps in setting up a proper Financial PlanningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process.read more & Analysis teamHighlights the key factors and changes every month.Does not create pressure to prepare the complete yearly forecast after the year-end, as the next 12 months’ forecast numbers are always available.It keeps track of essential drivers that are critical to any organization’s success.

Disadvantages

  • It is a time-consuming processMany organizations find it challenging to implementFrequent changes are challenging to process period over period

Points to Note

With the development of a computerized accounting system, it is easy and quick to prepare the rolling forecast numbers and books of accounts as all the departments are interlinked through ERPERPThe full form of ERP stands for Enterprise Resource Planning. ERP is a process to integrate the basic processes such as Finance, HR, Manufacturing, Supply Chain in one single integrated system. ERP is a system that helps organizations to smoothly run their operations by integrating the basic operations systematically.read more – Enterprise Resource Planning systems. However, an organization must always monitor and analyze the rolling forecast numbers with actual financial results to implement changes. Also, the simulation process should be run with the maximum variable to understand the impact of changes in one variable on final numbers.

Conclusion

According to one survey, Rolling forecast is still being used by only 42 % of the organization, and the rest are again using the static forecast method, which is prepared once a year, and no frequent changes are made. So, we understand here that the implementation and preparation of such a model is a tough task. However, at the same time, it has its exclusive advantages, which are an essential part of any business entity in today’s cut-throat competition where information is passing at light speed, and correct decisions at the right time can do wonders. So, after careful analysis, an organization should move to a rolling forecast model from a static one.

This has been a guide to What is Rolling Forecast and its Meaning. Here we discuss the Rolling forecast’s example and its components, advantages, and disadvantages. You can learn more about budgeting from the following articles –

  • Capital BudgetingTraditional BudgetingZero Based Budgeting DefinitionRisk Budgeting DefinitionStandard Cost Formula