Rolling Forecasts for Businesses- Definition & 8 Steps

Organizations that rely on manual performance tracking and limited insights are unable to accurately predict future trends.

However, with rolling forecast solutions, companies can incorporate real-time data with historical information to generate detailed predictions. This gives businesses a competitive edge over companies that are unable to detect changing market trends.

What is a Rolling Forecast?

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A rolling forecast is an adaptive management tool that uses predictive analysis to enable businesses to plan for future events. For example, if a retailer is planning their calendar for the next fiscal year, a rolling forecast will re-forecast the following 12 months every quarter.

This active approach to continuously adapting projections ensures the predictions consider any changes and emerging trends. Rolling forecasts provide the most accurate, up to date information, enabling companies to alter plans or strategies in order to optimize their performance.

Many companies use this tool to create a realistic budget. With insight into sales and revenue projections, organizations can re-allocate inventory and optimize operations to promote profitability.

Rolling forecasts have come a long way since traditional budgeting methods, which use static metrics to set long-term goals. Traditional budgets are built from the "bottom-up," meaning companies supply their own forecasts based on personal revenue and expenses first.

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These forecasts are then totaled, alongside corporate financial data, to create an overview. Management then takes this information to develop a 3-5 year plan, where income sources, product lines, and strategies are defined to meet sales goals. This method focuses on where a company can allocate funds to remain within budget while maximizing profits. However, the traditional approach has considerable downfalls-

  • Traditional Budgeting Does Not Consider Real-Time Metrics
The traditional method is extremely time-consuming, taking up to six months for larger enterprises, making it impossible to accurately project future budget needs. By the time the process is complete, the values used to set budget limits may no longer be valid. Therefore, the final plan could become ineffective almost immediately after it launches.

  • Traditional Budgets Undersell Forecasts
With this technique, management is obligated to present minimized sales forecasts to ensure teams can meet the benchmark. This means any additional sales, even if they fit within the expected range, will exceed expectations.

While this seemingly improves performance levels, it reduces the forecast's accuracy. On the other hand, the rolling forecast method considers real-time data to put business performance and emerging trends into perspective.

8 Steps to Conduct a Rolling Forecast

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The rolling forecast method process takes time and practice to master, as it is a repetitive procedure that accumulates more data as time goes on. The steps must be completed in sequential order to avoid having to repeat stages-

1. Set an End Goal

First and foremost, the managers of the forecasting project need to identify the objective and whom it serves. There needs to be a clear understanding of which employees will utilize the forecast report and how it will impact their workflow.

For example, retailers may use a rolling forecast to assist their marketing teams in creating effective campaigns based on emerging customer demand for a particular product. This would involve markers and sales representatives, as the end goal would be to increase customer reach, as well as sales and revenue.

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2. Create a Timeline

Management needs to settle on a timeframe that will determine how far ahead to forecast. It should be noted, the further into the future a business forecasts, the less accurate the predictions are.
Next, the managers need to determine the best forecasting increments, such as weekly, monthly, or quarterly. Again, the longer the increments, the less detailed the reports will be.

For example, a company that wants to forecast a year into the future can set two-week increments, in which the forecasting mechanism updates its predictions every two weeks.

3. Determine Forecast Parameters

The less detailed a report is, the higher the changes a company has of making poor decisions. Therefore, management needs to determine what parameters a forecast will generate in order to optimize performance.

While some businesses may think they want every metric, insights are more effective when an analysis is catered towards a specific operation. Otherwise, breaking down a forecast can be overwhelming. Therefore, management needs to determine which key performance indicators (KPIs) are relevant to their project.

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4. Designate Project Responsibilities

While forecasting is certainly a group effort, not everyone within a department needs to participate in the procedure. Management should only designate tasks to qualified employees with impactful insights to enhance and streamline the process.

5. Determine Quantitative and Qualitative Elements

It is important to incorporate a balance of quantitative and qualitative information that illustrates how a business can optimize their operations. This type of data is known as value-drivers - relevant insights that identify what processes have the ability to improve overall performance and promote business expansion.

6. Find Data Sources

Through thorough research and vetting, management must locate credible sources that provide reliable data. The accuracy of the collected information directly impacts the accuracy of the final forecast.

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7. Establish Scenarios

An advantage the rolling forecast method has over other tactics is its ability to create a range of scenarios. These scenarios enable management to develop plans on how to respond and different possible financial outcomes.

As real-time metrics are generated, forecasts can update projections and rework scenarios to stay relevant and provide the most accurate insights.

8. Track Performance

Once the forecast model is established and running, management should continuously compare actual and expected performance to determine if predictions are feasible. Following the reports also enables employees to understand how an event occurred, what caused it, and how to respond.

The rolling forecast method is an effective way to anticipate changes in market values, customer demand, and other industry trends so companies can optimize their internal processes.

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