With the increasing availability of great finance technology, the focus of finance teams has gradually shifted to the future. In the past, a world-class finance team could, among other things, keep the books in perfect order, close a month fast, and produce insightful variance analyses. Today’s finance teams are challenged to do much more: what in the past made them great we now give for granted.

A rolling forecast is one of the tools that modern finance teams need to master complementing the traditional budgeting process. Annual plans are great to provide direction, but they can become out-of-date shortly after they were created. The world changes faster than ever before. Embracing a rolling forecast gives your company the ability to keep up with changes – good or bad – that influence your business in the present and in the future.

What Is a Rolling Forecast?

A rolling forecast helps your company continuously predict future outcomes (usually every month) based on the latest available data. They typically cover a period of 12 to 24 months. They provide you with a tool to not only be more accurate but also influence business strategy.

Diving into more detail, here are a few practical benefits:

1. They are operational, not just financial. They don’t solely focus on financial outcomes, but they take a driver-based approach using operational metrics. For example, instead of hardcoding an ARR target, they set assumptions on the underlying activity necessary to get there: sign 15 new customers every month, with an incremental 3 customers every quarter, for an Average Selling Price of $27.5K. When the ARR target is over- or under-achieved we will be able to understand why exactly that happened and take corrective measures
2. They allow dynamic and up-to-date scenario planning. Let’s say the market is in turmoil and your customers are in a “wait-and-see” approach and delay any purchasing decision. You don’t feel that confident anymore about signing up 15 new customers every month. What happens to your ARR if you were to sign up only 10 every month? What about the Cash Out Date? With a rolling forecast you can easily create best and worst-case scenarios, and update the key drivers every month to the best of your knowledge
3. They enable a more proactive resource allocation. A great rolling forecast will provide with different views – high level and granular. The latter will help you assess how resources are invested across different departments and teams. It empowers leaders to find out which areas on below-, on- or above- target, and reallocate resources accordingly

A rolling forecast does not only tell you whether your prediction was correct, and to what extent. It also gives you insights into how to correct variances from the annual budget to meet company goals.

What Is a Traditional Budget?

The traditional budget is an annual plan (usually in line with the fiscal year) that is extrapolated from the previous year’s historical data. It’s the most widely used tool. Whilst it was a great fit for purpose in the past, today’s world is moving too fast to work with a static view of the company’s revenue and expenses. Especially startups evolve too quickly: their success is determined by how fast they can adapt to changes, which makes a static annual budget a misfit.

You will incur two main challenges if you only work with a traditional budget:

1. An out-of-date view of the business. Firstly, requiring non-finance leaders to forecast revenue and/or costs over a year or more leads to inaccuracy. Once the budget is frozen, it becomes less and less up-to-date as the months pass
2. Confidence and trust. In theory, the budget sets the targets for the year. In practice, as soon as it’s clear the reality is deviating from the plan, people start losing confidence in the budget. Furthermore, people will try to sandbag the plan, either asking for more than is necessary upfront, or forcing to spend with what’s left at the end of the period

Complementing your budget with a rolling forecast addresses these shortcomings.

Complementing a Budget With a Rolling Forecast

The wiser decision is to adopt both a rolling forecast and a budget. This provides flexibility in the short-term and direction in the long-term. Also, using a rolling forecast does not mean downplaying variances from the budget. CFOs need to keep themselves and their teams accountable and reduce variances over time with more sophisticated forecasting methods.

The combination of a rolling forecast and a budget gives companies real-time insights necessary to adjust strategy and push the business forward. They help you make sense of data and develop narratives for variances, which increases the effectiveness of your team as well as the trust of your investors.

How to Create a Rolling Forecast

There are some great guides out there on how to create a rolling forecast. Here is one of them. But for less experienced finance professionals, maintaining a budget and a forecast can become time-consuming and error-prone, particularly if their financial model is not fully automated or the underlying data is not clean enough.

Therefore it is important to use a modern financial model that includes the following:

• Drivers that take into account all the key revenue and cost mechanisms unique to your business
• A division between Actual months (with real data) and Forecast months
• Updating monthly actuals from multiple systems (e.g., bookkeeping, CRM, billing, HRIS, etc.) in a few clicks
• Version control and variance analyses functionality to seamlessly compare different plans

A great financial model will minimise the time spent maintaining it and maximise the time spent creating insights. Balancing a budget and a forecast is the best way to predict future outcomes whilst following a roadmap for growth.

This Is Why You Cannot Live Without a Budget and a Forecast

World-class strategic finance is about bringing together short-term focus and long-term vision. These are key to making the right decisions for your business.

They have been hot topics for a long time, but only in the last few years has technology advanced so much to provide a significant competitive advantage for those adopting it.

You can now be in control of your future with the right tools to execute your vision.