Rolling Forecast is a type of forecasting method used in finance to continuously plan and adjust the budget based on the latest assumptions and external developments. It is a dynamic approach that involves constantly reassessing and monitoring the assumptions supporting the forecast, as well as the impact of management actions. This type of forecast is especially appropriate in volatile operating environments where the ability to adjust quickly is essential for success.
Overview
Rolling Forecast is an ongoing process that adjusts the forecast as frequently as needed, in anticipation of future developments and changes. The aim is to protect the organization from excessive risk while at the same time accurately predicting market trends and developments. It should be conducted with a periodic, or rolling, basis to account for the dynamic nature of the organization and the ever-changing developments in the external environment. Typically, organizations repeat the forecasting process for each three or four months, although the frequency may vary depending on the organization’s needs.
Advantages
The Rolling Forecast gives finance managers the flexibility and agility to respond to changes in the operating environment swiftly and accurately. Because the process is repeated on a periodic basis, it allows the finance team to identify potential areas of risk and adjust budgets accordingly. This allows the organization to allocate resources more effectively and efficiently, while at the same time accounting for unforeseen external developments or management decisions.
It also offers the finance team the ability to receive feedback quickly, making it easier to identify problem areas within the budget quickly and adjust the forecast without having to go through a complete cycle of exemption. This provides the organization with a greater degree of confidence in its budgetary decisions.
Disadvantages
The Rolling Forecast approach requires a significant amount of resources in order to keep the process running periodically. It can place a strain on the finance team’s resources, which can be costly and difficult to manage in the long run. Additionally, there is the risk of inaccurate forecasting due to incorrect assumptions and external factors, which can lead to budgetary issues. Additionally, since the process is ongoing, there is the potential for high levels of stress and fatigue in the finance team.
Example
Consider a retail company that specializes in seasonal items such as swimwear and beachwear. The sales of these items typically spikes in the summer months and dips in the winter months, reflecting the change in the weather. To take this into account, the company opts to use a Rolling Forecast approach, which allows them to accurately forecast and manage the budget for the different seasons. By repeating the forecast every 3-4 months, they can adjust their budget to account for any changes in the market or any unexpected weather patterns, allowing them to get the most out of the budget and plan for the future effectively.
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