Simply put, a rolling forecast is a budget that adapts for the passage of time. For example, if a rolling forecast is 12 months long, when the first month passes, it is dropped and one month at the end of the forecast period is added.
So each month, a company would always have a forecast -- including figures for sales, profits and cash flow -- for the coming 12, and it just keeps rolling along, according to Asoka Karandawala, an independent finance director at AKCA Consulting in London.
Experts weighed in on both sides of the debate and came up with the pros and cons of these types of forecasts.
Point: Rolling forecasts boost agility
Rolling forecasts are becoming more popular with finance executives for a number of reasons, Karandawala said.
"For one thing, you always have a set of figures that you can show your board [and] your senior people. And if you ever want to get some funding from outside to expand your business or buy some equipment, the bank will usually say, 'Give us a forecast for your next 12 months and your cash flow,'" Karandawala said. "With a rolling forecast, you have a foundation to pull these figures from."
Additionally, when preparing a rolling forecast, a finance executive is able to adjust it to reflect new information regarding the company's economic environment.
"So if you're doing better than you thought, and you think that's going to last, you can [adjust] the figures for the coming twelve months upwards for sales and profits, or downward if you're not doing as well as expected," Karandawala said. "It gives management [the] actions they need to take to improve the figures, or whether they need to buy more equipment or hire more people or to take a positive action."
Peter James Rhys Morgan, a macroeconomist in London, agreed with Karandawala's assessment.
"In many ways, these rolling forecasts provide advantages over the fixed budgets pioneered in the 19th and 20th centuries due to their ability to allow flexibility in financial decision making," Morgan said. "This flexibility can avoid cash flow problems and bottlenecks."
With a rolling forecast, companies maintain a consistent horizon, said Steve Player, founder of management consulting company The Player Group in Dallas.
"At my company, we advocate eliminating budgets and replacing them with rolling forecasts ... which respond to a dynamic world," he said. "The number one benefit of moving to a rolling forecast is that it allows you to update your vision of the world and to continuously update your plans so that you can address and optimize [for] the things that are coming.
"If the economy is getting better, you can go with that. If the economy is getting worse, you can defend against that. If your key competitor takes an action, you can update your plans accordingly," he continued. "So instead of being locked into those assumptions you thought of in the middle of the previous summer -- which is what a budget does -- with a rolling forecast, you can constantly update and adjust."
Counterpoint: Rolling forecasts sap time and money
But there are downsides to adopting a rolling forecast. Because companies have to revise them on a monthly or quarterly basis, the process is time-consuming, resource-intensive and expensive.
"The rolling forecast being what it is, someone actually has to sit down and work it out," said Karandawala. "So you don't work hard for two or three months and set your 12-month budget, and then visit it again a year later. In a rolling forecast, you have to be doing the figures all the time, so you really have to [account for] some of your finance team's time occupied doing the forecast every month."
For that reason, smaller businesses are probably unlikely to move away from the traditional 12-month set budget, he said. But for companies that have adequate resources, moving to rolling forecasts makes sense.
"Rolling forecasts have gotten more popular with the multinational companies that are listed on the stock exchange and really need to know where the business is going, which markets are doing well and which aren't," Karandawala said. "So those are the guys like the Unilevers [that are] really getting into rolling forecasts because they can then predict what they need to do over the next 12 months, at least, given the changes in the economic climate in the countries where they operate."
Player said companies can be hesitant to put in rolling forecasts because the finance executives "almost die" doing the annual budget and they're "deathly afraid" of doing that four or 12 times a year. "Their fear is that they'll always be budgeting," he said.
Additionally, said Player, some companies worry that rolling forecasts that are constantly being updated will lead to a lack of accountability internally.
"One of the illusions of budgeting is that [it] can be used to establish accountability," he said. "If I negotiate an annual budget and I give you that budget, come hell or high water, you have to hit that budget. If I allow people to update the forecast and update their target, how do I hold them accountable?"
About the author:
Linda Rosencrance has written about technology for more than 10 years and has been a reporter for more than 20 years. A former Computerworld reporter, she is a freelance writer in Massachusetts and also an author of several true-crime books.