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The pandemic demonstrated just how important business resilience can be for an organization. A key element of optimal business continuity is agility. If your finance team is looking to improve agility in its day-to-day operations, rolling forecasts can help.
Towards the end of 2021, the world’s central banks were calling inflation “transitory” - a temporary problem that was nothing to worry about - and a mere six months later, the world entered its worst inflationary cycle in decades. Moreover, in the last few years alone, organizations have faced other concerns, such as Brexit, trade tariff standoffs and protectionism, supply chain gridlock, and the Russian invasion of Ukraine. Now, in 2022, the world’s financial markets are experiencing high volatility, interest rates are rising, and most economists predict a coming recession.
These are all external events that are causing uncertain market conditions, over which organizations have little to no control. However, these factors can severely curtail performance and even become an existential threat. For this reason, organizations must proactively take charge of what is in their domain of control, taking steps to make their operational processes and infrastructure as agile as possible, to support resilience and business continuity. One method of supporting enhanced agility is by transitioning to rolling cash flow forecasts. While there are challenges in doing so, they can put a company in a much stronger position, with far more precision, relevance, and market awareness ‘baked into’ their strategic planning.
What is a rolling cash flow forecast?
The ‘rolling’ method of cash flow forecasting sees a financial department periodically update their cash flow outlook. There is typically no maturity date for rolling forecasting. Instead, the forecast simply gets updated constantly, such as on a weekly or monthly basis. In this way, a rolling budget is a “live” document that is regularly updated to reflect changing market/business conditions and developments.
Rolling forecasts versus traditional forecasts: What is the difference?
A traditional cash flow forecast is a predictive analysis of an organization’s cash inflows and outflows to measure future performance, such as on a monthly, quarterly, or annually basis. It is a ‘set-and-forget’ document that is used to assist an organization in its financial planning process and organizational strategy.
In comparison, a rolling forecast model is a constantly evolving document that is updated periodically to reflect changes to accounts receivable and payable. For instance, a sudden central bank interest rate hike typically results in a company having to pay more interest on business loans from commercial banks. In a rolling forecast, the finance department can make such a change, whereas this would not be possible with a traditional static forecast.
What are the challenges of traditional forecasting?
The primary disadvantage of the traditional method of forecasting is that, should business conditions or performance change from what is predicted, the forecast is immediately rendered inaccurate and out of date.
For instance, if an expected large cash inflow fails to materialize, as a result of debtor payment default, the resultant cash balance will be incorrect, which will then impact the entirety of the rest of the forecast. If multiple events occur which differ from the predicted, the forecast very quickly becomes out of date. The result is that organizations may either still use a forecast that is out of date or inaccurate, or fail to use it because they don’t feel that it is of use any more, which means that they must strategize and execute without the crucial foundation that an accurate forecast provides.
What are the benefits of a rolling forecast?
They enable the financial department to constantly keep the company’s financial outlook up to date. As a result, executives are fully aware of how such changes will impact the company’s finances, which positions them to plan, allocate funding, and make the necessary changes to optimize the company’s cash flow.
A rolling forecast model helps a company to:
- Identify cash flow shortfalls with more recent business and market intelligence
- Plan for future growth with more accurate insights at hand
- Identify areas of business that are generating suboptimal performance
- Provide early notification of upcoming funding gaps and the opportunity to pivot accordingly
- Avoid outgoing payment defaults and highlight commercial opportunities
All of these benefits are also possible with a traditional cash flow forecast. However, the core benefit of the rolling variety is that it enables much greater precision and market relevance as it is much more up to date. Therefore, organizations work with much more reliable insights, whereas a traditional forecast may no longer provide accuracy. In fact, the traditional type of forecast may even damage an organization by guiding company executives with a completely out-of-date cash flow outlook, which varies greatly from reality.
Tips to transition easily to rolling forecasts
When deciding to move on from traditional financial forecasting to a rolling forecasting process, there are a number of factors to consider.
1. Potential resistance to change
Corporate finance leaders have traditionally focused on standard cash flow forecast processes. Moreover, the various stakeholders in the wider financial ecosystem also tend to work with, and expect, the standard variety, such as investors. Therefore, the first step in making the switch to rolling forecasts is to communicate the benefits among the company’s decision-makers, investors, and advisors.
2. Automation and data technology
You can support the finance department with investment in the right automation and data management technological capabilities. Building out a robust tech stack can markedly reduce workload for various needs, such as data gathering, entry, and analysis.
3. New workflow process design
Changing to rolling forecasts tends to increase your finance team’s workload, as they are moving from a once-and-done approach for a set period of time, such as a year, to a periodic update approach, such as on a monthly basis. This may necessitate further recruitment, although investment in the right technologies, as mentioned in point two, can alleviate workload in other ways. A full understanding of how committing to rolling forecasts by redesigning the finance team’s workflow will help them make the transition, as well as highlight any possible bottlenecks.
Best practices to maximize rolling forecast performance
To optimize the effectiveness of your rolling forecast process, here are some best practices to follow.
Define your rolling forecast goals
What exactly do you want rolling forecasts to help your company with? What is it that you expect from them that is different from the traditional static forecast model? It is important to write these goals down, to be able to measure performance against your ideal outcome.
Identify data sources and define your collaborative process
Data will be essential to the accuracy and efficacy of your rolling forecasts. Defining data sources and how to manage it - its capture, storage, analysis, and interpretation - is key. Moreover, the right software that enables efficient collaboration across departments is also an essential prerequisite to support rich data management and financial forecasting precision.
Upgrade from spreadsheets
A reliance on spreadsheets can significantly hamper a financial department. While they may still have a role to play, dynamic, data-driven technologies such as FP&A software can provide a wealth of highly useful features such as automation of data entry, end-to-end data management, and rolling forecast support.
Decide the period of time for updates
Each business and industry is different. Depending on your company’s own specific needs and cash flow profile, it may be best to update your rolling forecasts fortnightly, monthly, or quarterly. Your financial department should have clear dates to produce an updated forecast report for, such as the first of every month.
Review performance
At the end of each rolling period, an appraisal helps your organization understand how accurate - or not - each forecast update was, by comparing the predicted cash inflows and outflows against the reality of how the company’s financials have gone for the period in the forecast. This better enables you to take necessary steps to address problem areas accordingly.
Driving optimal corporate agility with rolling forecasts
Finance teams can use rolling forecasts to be more agile and strategic. While there is more work involved, the trade-off is that your forecasting is likely to be much more accurate and up to date with more recent changes to market and business conditions incorporated into your financial outlook.
Since the pandemic began in 2020, improving business continuity credentials and resilience are key goals for company executives. In a volatile global corporate environment, transitioning to rolling forecasts can help your company become more robust and future-proofed against the potential for negative events to impact cash flow. Greater precision in the forecasting process can also support your organization with optimal financial management strategy design.
