Rolling forecasts

What Is Rolling Forecasts?

Rolling forecasts are a continuous financial planning process that consistently updates projections for a future period, typically 12 to 18 months, by dropping the oldest completed period and adding a new future period. This method falls under the broader category of Financial Planning and Analysis (FP&A) and aims to provide an always-current view of a company's anticipated financial performance. Unlike static plans, rolling forecasts are dynamic, allowing businesses to adapt swiftly to changing market conditions and internal developments. They are a critical tool for decision making, enhancing financial visibility and enabling organizations to maintain a forward-looking perspective on their operations, revenue, and expenses⁶², ⁶³, ⁶⁴.

History and Origin

The concept of financial forecasting has roots in ancient civilizations, where basic mathematical models were used to predict agricultural yields. However, modern financial forecasting truly gained traction with technological advancements in the 20th century, particularly with the advent of computers and sophisticated statistical models⁵⁸, ⁵⁹, ⁶⁰, ⁶¹. The shift toward more dynamic forecasting methods, like rolling forecasts, accelerated in response to increasingly volatile and complex global markets. While traditional annual budgeting dominated for decades, its limitations became increasingly apparent as business cycles shortened and market conditions became less predictable⁵⁶, ⁵⁷.

The formal adoption and emphasis on rolling forecasts as a more agile alternative gained significant momentum in the early 2000s, with various studies and industry publications highlighting their benefits over static annual budgets. By consistently extending the planning horizon, rolling forecasts address the inherent rigidity of annual plans that quickly become outdated. For instance, an article from Harvard Business Review in 2005 discussed "Why Rolling Forecasts Will Change Your Business," underscoring a growing recognition of their strategic value in adapting to continuous change. HBR Article

Key Takeaways

• Rolling forecasts are continuous, updated financial projections that typically maintain a fixed future horizon (e.g., 12-18 months) by adding a new period as an old one concludes.⁵³, ⁵⁴, ⁵⁵
• They provide a dynamic and flexible view of future performance, unlike static annual budgets that become outdated quickly.⁵¹, ⁵²
• This approach enhances a company's agility and responsiveness to market shifts, economic changes, and internal operational developments.⁴⁹, ⁵⁰
• Rolling forecasts support more informed strategic planning and decision making by basing choices on current data and future outlooks.⁴⁶, ⁴⁷, ⁴⁸
• While offering significant benefits, implementing rolling forecasts can be resource-intensive and requires robust data management and cross-functional collaboration.⁴³, ⁴⁴, ⁴⁵

Interpreting Rolling Forecasts

Interpreting rolling forecasts involves understanding not just the projected numbers but also the underlying assumptions and drivers that shape them. Unlike a static forecasting document, a rolling forecast is a living model that reflects current business realities and external factors. Analysts typically look for trends, variances from previous forecasts, and the impact of recent actual results on future periods⁴¹, ⁴².

For example, a sudden shift in revenue recognition or an unexpected increase in operating expenses in a recently completed month would immediately influence the remaining periods of the rolling forecast. This continuous adjustment allows management to assess the health of the business in real-time, anticipate future challenges or opportunities, and evaluate the effectiveness of past decisions. The objective is to provide a reliable estimate of what will happen, enabling proactive adjustments to operations and strategy.⁴⁰

Hypothetical Example

Consider "Alpha Tech Solutions," a software company that uses a 12-month rolling forecast for its financial planning. In January, their forecast spans from February through January of the next year.

Scenario: In March, Alpha Tech lands a major new client, significantly increasing anticipated revenue recognition starting in Q2. Simultaneously, a key software vendor unexpectedly raises its licensing fees, impacting operating expenses.

Rolling Forecast in Action:

1. March Actuals: As March closes, actual revenue and expenses are incorporated.
2. Period Drop/Add: The data for January is dropped, and January of the following year is added to the forecast, maintaining a continuous 12-month view.
3. Adjusting Projections: The finance team immediately updates the forecast to reflect:
   • The increased revenue from the new client across future months.
   • The higher software licensing costs, adjusting expense projections for the remainder of the forecast horizon.
   • Any resulting impact on expected cash flow management and profitability.
4. Analysis: The team then conducts variance analysis to understand how the new client and increased costs affect the original plan and presents the updated outlook to management. This allows Alpha Tech to make agile decisions, such as reallocating resources or adjusting marketing efforts, based on the most current information.

Practical Applications

Rolling forecasts are widely applied across various industries and organizational functions to enhance agility and responsiveness.

• Corporate Finance: Businesses utilize rolling forecasts for dynamic cash flow management, ensuring liquidity and optimizing working capital. They are crucial for anticipating funding needs for capital expenditure projects and managing debt.³⁸, ³⁹
• Strategic Planning: Rolling forecasts provide up-to-date financial insights that inform strategic planning. They enable organizations to assess the financial viability of new initiatives, market expansions, or product launches with current data.³⁶, ³⁷
• Performance Management: By continuously updating projections and comparing them to actual results, companies can identify deviations early and implement corrective actions. This helps align operational activities with financial goals. Many leading organizations use the forecasting process to develop insight and assess future opportunities and risks.³⁵
• Risk Management: In volatile markets, rolling forecasts are instrumental in risk management by allowing companies to model different scenario analysis and assess the financial impact of potential disruptions.³³, ³⁴
• Supply Chain and Operations: For businesses with complex supply chains, rolling forecasts help optimize inventory levels, production schedules, and procurement by providing continuously updated demand and cost projections. KPMG notes that rolling forecasts can bring insight in terms of where an organization is heading, indicating what it is achieving and highlighting the aspirational gap between projected performance and defined targets.³²

Gartner, a prominent research and advisory company, predicted that by 2024, half of organizations would have replaced their annual budgets with rolling forecasts, highlighting the growing trend and perceived effectiveness of this approach. Gartner Press Release

Limitations and Criticisms

Despite their advantages, rolling forecasts are not without limitations and can pose challenges in implementation and use.

• Resource Intensity: Developing and maintaining rolling forecasts can be more time and resource-intensive than traditional annual budgeting. They require frequent data collection, updates, and analysis, which can strain finance teams, especially if processes are not automated.²⁹, ³⁰, ³¹
• Data Quality and Preparation: The accuracy of rolling forecasts heavily relies on the quality and timeliness of input data. Poor data hygiene or inconsistent data sources can undermine the reliability of the projections.²⁶, ²⁷, ²⁸
• Complexity and Implementation Difficulty: Transitioning to a rolling forecast model often involves significant changes to processes, systems, and organizational culture. Resistance to change and the need for new software or skilled personnel can make implementation complex.²³, ²⁴, ²⁵
• Over-forecasting Tendency: Some critics suggest that continuous forecasting might lead to an overemphasis on short-term adjustments, potentially diverting focus from long-term strategic planning or fostering a culture where targets are constantly "re-forecasted" downwards to meet expectations.²¹, ²²
• Lack of Comparative Analysis: A traditional limitation with rolling forecasts is that if only a 12-month timeframe is used, it can make direct year-over-year comparisons more challenging for historical financial statements and Key Performance Indicators.²⁰

An article on CFO.com titled "Rolling Forecasts: Not So Fast" discusses some of the pitfalls and reasons why not all companies fully embrace or succeed with rolling forecasts, including the potential for them to be misleading if the original budget is abandoned and the company loses track of initial expectations. CFO.com Article

Rolling forecasts vs. Budget

The terms "rolling forecasts" and "budget" are often used interchangeably or confused, but they serve distinct purposes within financial planning.

While a budget establishes a benchmark for expected performance and is often linked to accountability and compensation, a rolling forecast provides a fluid, up-to-date outlook that helps managers navigate real-time changes and make agile decisions. Many organizations use both in conjunction, with the budget setting strategic targets and the rolling forecast providing continuous operational guidance.¹⁶, ¹⁷, ¹⁸, ¹⁹

FAQs

What is the primary benefit of a rolling forecast?

The primary benefit of a rolling forecast is its ability to provide a continuously updated and relevant view of future financial performance. This dynamism allows businesses to be more agile, making timely and informed decision making possible as market conditions or internal factors change, unlike static annual plans.¹³, ¹⁴, ¹⁵

How often are rolling forecasts updated?

The frequency of updates for rolling forecasts can vary depending on the industry, business volatility, and available resources. Common update cadences include monthly or quarterly. The key is that as one period concludes (e.g., a month), it is dropped, and a new future period is added, maintaining a consistent forward-looking window.¹¹, ¹²

Can rolling forecasts replace traditional budgets entirely?

While rolling forecasts offer significant advantages in agility and real-time responsiveness, they often do not entirely replace traditional budgeting. Many companies continue to use an annual budget for setting fixed targets, allocating resources, and evaluating performance against a baseline, while using rolling forecasts for ongoing operational guidance and dynamic financial projections.⁷, ⁸, ⁹, ¹⁰

What kind of data is used in rolling forecasts?

Rolling forecasts leverage a combination of historical data, current actual financial results, and continually updated assumptions about future market trends, economic conditions, and internal operational drivers. This robust data input, including relevant Key Performance Indicators, helps ensure the accuracy and relevance of the projections.⁴, ⁵, ⁶

Is specialized software required for rolling forecasts?

While basic rolling forecasts can be managed with spreadsheets, specialized financial planning and analysis (FP&A) software is often highly beneficial. Such software can automate data integration, facilitate scenario analysis, and streamline the update process, making rolling forecasts more efficient and accurate, especially for larger or more complex organizations.¹, ², ³