Plan, but be realistic

Forecasting for Experts

The financial year is marching on – and the gap between the budgeted and actual income and expenditure is getting wider all the time. Does that sound familiar? If so, we can give you two pieces of good news. The first is that you’re not alone: it’s the same at many other companies too. The second is that this is something that you can change. If you’re looking to plan more realistically and more precisely, identify trends sooner and respond more effectively to undesirable developments, you can count on rolling forecasts.

The first principles of forecasting

Most businesses draw up a budget annually for the next financial year. This involves looking fifteen to eighteen months into the future, as the financial year is normally planned three to six months before it starts. However, given the complexity and the fast pace of today’s markets, a realistic assessment of all planning parameters over the entire period is almost impossible.

This is where the forecast comes into play. With reference to the actual data, the forecast delivers a projection into the future. Using the current business figures generates an outlook that is closer to reality and more reliable than the annual budget. Where expectations are not being met, the forecast provides an opportunity for a course correction with due regard to the latest developments – so much for the theory.

A weak point: the year-end forecast

In practice, most businesses produce a year-end forecast. They want to know during the financial year whether the targets are going to be achieved. Based on the figures up to that point, a calculation is made as to what the months up to the end of the financial year will bring. Many businesses use the forecast once as a monitoring tool towards the end of the year: in the final quarter it delivers the outlook on the remaining few weeks of the financial year – and enables short-term measures for achieving the targets.

But this is when quite a few people ask themselves whether they could have – or should have – acted sooner.
For the purpose of effective business management, this approach has an obvious weakness: the year-end forecast sets itself a deadline at the end of the year that does not exist as such.

Forecasting for experts

Companies can expand the limited view of their year-end forecast by using rolling forecasts which allow them to act in the longer term. Rather than producing projections for a fixed end date, a rolling forecast always reviews a time span of the same length, so you can look twelve months into the future from any given point in time – no matter when the financial year ends.

There are also differences in terms of frequency: unlike the year-end forecast, which is often prepared just once a year, the rolling forecast is produced at regular intervals, for instance, every month or two. The regular outlook over a fixed time span allows a continual review of goals and strategies. With rolling forecasts, undesirable trends become apparent sooner, the company’s direction is continually monitored, and end-of-year surprises are a thing of the past.

Time and effort versus a reliable basis for planning

All these advantages raise the question of why all companies didn’t start using rolling forecasts long ago. The answer is supposedly obvious: because that would involve far too much time and effort. But this is not the case. The days when forecasts kept staff in several departments busy for weeks at a time are over.

Why? That’s quite simple: because you already have your business data available in digital form. The ground has thus been prepared for producing forecasts in a fraction of the time and effort that used to be required and for providing a considerably more reliable basis for planning. Rolling forecasts are part of the potential of digitisation that is just waiting for you to exploit – and that will transform your actual data into a unique monitoring tool.