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Less Budgeting, more Rolling Forecasts

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Anri Keyser

Anri Keyser, Decision Inc.

Businesses face a world where the market becomes more competitive by the day and the only constant is change. Any business requires the ability to adapt, embrace and grow with this change.

No matter how well an organisation has performed in the past, the prime focus and expectation from the board and investors will always be on delivery and performance in the future. The reflection of a company’s future is the outcome of the detailed planning they undergo on an annual, quarterly or monthly basis – to most this is known as the budget or forecasts.

Traditional Budgets

For many years now, the traditional way a business would execute this detailed planning exercise would entail that after the corporate strategy was set, a detailed annual budget is compiled. The process to compile this annual budget is traditionally a manual and timely process and requires input from many different business resources. Once compiled, it would then be a key focus for business not to deviate from this annual budget regardless of any changing market conditions.

This traditional budget is always static and over the period of the Financial Year becomes disconnected from the reality of changing market conditions. It is mostly focused on cost management and does very little to create value for the business. In addition, the typical budget usually has somewhat limited perspective of non-financial business drivers and tends to be exceptionally financially dominant.  Managers spend more time on working towards their expected numbers, than focusing on linking their business activities back to the bigger business strategy and adjusting to the competitive market changes.

Adding Rolling Forecasts to the Equation

In order for a business to emerge victorious a competitive market and adapt, embrace and grow with the change. Then reengineering the detailed planning process must become a focus and part of the business strategy. For a business to plan effectively, the planning process should start with the strategy as a foundation for the detailed annual budget. A traditional annual budget should not indicate ready, steady and go; but rather be the base for a lower level of detail rolling budget or better known as a rolling forecast.

Making use of a rolling forecast puts a business in the position to continuously re-plan and have the ability to consider all external and internal changes. For example, in the case where there is volatility in exchange rates , which tends to be a common occurrence in emerging markets, an organisation will be able to make the necessary adjustments and run various what-if scenarios during planning processes.  This will ensure that a plan exists as a starting point for any likely volatile occurrence that could have a positive or negative impact on the business.

With this said, a rolling forecast should be seen as a management instrument and not a way of measuring performance. Furthermore, rolling forecasts provide businesses with relevant plans that exceed the end of their financial year. Depending on the level of forecasting performed, the traditional budgeting process might not even be necessary at the end of their financial year. Rolling forecasts magnifies planning horizons for businesses as they actively revisit their Financial Plans and reassess how they align to the corporate strategy.

No Fixed Plans or Intent to Arrive

Rolling forecasts are an ideal planning and management mechanism for dynamic and fast-paced businesses that do not experience radical changes in their organisation. When it comes to businesses that go through a significant change or transformation of some sort, it will be best to park a rolling forecast and revert to a detailed traditional budget determined by the new formulated corporate strategy. Once a new annual budget is set, the rolling forecast process can be reinitiated.

To Conclude

As Lao Tzu said: “A good traveller has no fixed plans, and is not intent on arriving“. This also reflects why businesses should make use of rolling forecasts. All businesses work toward growth and success as a destination and having the ability as a business to adapt, embrace and grow with the change serves as a key reason as to why a business should not make the year-end the only focus.

Rolling forecasts does not only provide business with the view of their corporate future, but also serves as the future for Planning.

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