Rolling Forecast in Beyond Budgeting

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Rolling Forecast in Beyond Budgeting

A rolling forecast is a financial approach that predicts the future performance of a business over a continuous period, based on historical data. Unlike static forecasts that forecast the future for a fixed time frame, e.g., January to December, a rolling forecast is regularly (typically monthly or quarterly) updated throughout the year to reflect any changes. It relies on an add/drop approach to forecasting that drops a month/period as it passes and adds a new month/period automatically. This enables a company to project its future performance based on the most recent numbers and time frame, which offers an advantage when operating in a fluid and ever-changing external environment.

Beyond Budgeting doesn't provide a fixed recipe that includes any specific ingredient. But rolling forecasts can be a promising tool to achieve dynamic financial forecasting and resource allocation.
When included in Beyond Budgeting implementation, rolling forecasts must possess the following features to be effective:

1. FOCUS ON THE KEY PERFORMANCE DRIVERS (KPIS INCLUDING RATIOS) AND THEIR TRENDS: The process must only focus on a few key performance drivers (such as orders, sales, costs, and capital expenditures, etc.) and their trend analyses, instead of masses of details. In addition, the most important communications from forecasts are not the actual numbers, but the trends. When the focus is placed on actual numbers, it is similar to using the forecasts as targets or fixed performance contracts, which will lead to corruption and unethical behaviors in the process, as is the case in a traditional budgeting system.
2. DISCONNECT FROM TARGETS, PERFORMANCE EVALUATION, AND REWARDS: To be impartial, forecasts must be an independent process disconnected from targets, performance evaluation, and rewards; only in this way will unbiased forecasts be obtained that truly reflect what has happened and will happen in the market. (Goals and performance evaluation standards should be set by and only for the front line teams themselves, since they are not only empowered to make strategic decisions but also take full responsibility for their own unit’s business results.)
3. USE RANGE FORECASTS: Executives often demand a number in forecasts, which implies certainty in the forecast and invariably ends up being the average of past periods. But averages are usually wrong. And averages added to averages are even more wrong, especially if other assumptions depend on them. Instead of aiming for precise forecasts (e.g. sales forecast) that are invariably wrong, leading organizations forecast a range of potential outcomes for key performance indicators. In this way, the organization will be used to—and better able to deal with—uncertain outcomes.
4. TRANSPARENCY AND TRUST: Organizations that use rolling forecasts rely on information and control systems that allow everyone in the company to see the same information at the same time. Therefore anybody who tries to manipulate the numbers would fail, although in rolling forecasts system, no one has a reason to manipulate or spin the numbers in the first place, because there are no fixed profit targets—or penalties for missing them
5. TRANSFER OWNERSHIP TO THE FRONTLINE TEAMS (LOCAL BUSINESS UNITS): When a company grows, senior management can’t know every aspect of the business and make sensible decisions. The only way to deal with this complex situation is to devolve planning and decision-making to front line teams (operation units) within an appropriate boundary and hold them accountable for business results. In the same logic, rolling planning and forecasts can only work effectively when proper authority and responsibility are devolved to the front line units. Therefore, rolling forecasts are best done by the business teams themselves with support from Finance (such as creating clear methods of standardizing inputs to the forecasts of KPIs, etc.). When the front line teams are held responsible for business results, (and the forecasts are not linked with any performance evaluation or rewards,) unbiased forecasts can be obtained from the teams for themselves to take timely strategic actions to deliver true value to their local customers. For senior executives, forecasts shouldn’t be used to micromanage or demand immediate actions, or else trust and confidence will rapidly evaporate. It is the front line teams that set goals, plans, and self-evaluation standards, and it is the teams that strive to improve their relative performance. The role of corporate center is to set strategic direction, governance procedures and broad performance goals. They use rolling forecasts and trends analyses to check that each unit is “within range” in terms of the agreed performance indicators, and only interfere if they are not.
6. ENABLE DYNAMIC RESOURCE ALLOCATION: In a rapidly changing business world where opportunities come and go in the blink of an eye, a dynamic resource allocation process is a necessity for every organization. This is made possible when dynamic and transparent rolling forecasts are well implemented, which makes available the critical information of the organization’s financial capacity anytime to any front line unit in the organization.

Sources:
CFO Thought Leader. (2014). "Rolling Forecasts: What is this practice and how effective is it?" [PDF file]. Retrieved from http://www.cfothoughtleader.com/wp-content/uploads/2014/04/Hope_ch33-1.pdf
Hope, J., & Fraser, R. (2003, Feb.). "Who Needs Budgets?" HBR. https://hbr.org/2003/02/who-needs-budgets
Hope, J., & Player, S. (2012). "Beyond Performance Management: Why, When, and How to Use 40 Tools and Best Practices for Superior Business Performance". Boston, Massachusetts: HBR.