Written by Heather L. Cole, July 26th, 2024
How is your annual budget process? Do you love it? Does it reflect the reality of what’s going on in your business? For many companies, the annual budgeting process is a ritual that often fails to reflect the dynamic business environment. Traditional annual budgets are static, becoming obsolete soon after they're created, and are rarely aligned with the real-time changes in the market. In this blog, we will discuss “Why Annual Budgets Don’t Reflect Reality and How Rolling Forecasts Can Save Your Business.”
I saw this in an older article on the Global Treasurer site and loved this analogy for the budget process.
Bjarte Bogsnes, vice president (VP) of performance management development at Norwegian oil and gas multinational Statoil, compares the traditional forecasting process with driving: “During the budgeting cycle we shine a strong light into the future,” he suggests. “Then we turn off the high beams and start driving into the next year with low beams only."
“As we drive on and the quarters pass, the low beams get gradually covered in mud and become weaker and weaker. Is this a safe way of driving in the dark?”
Why Annual Budgets Fall Short
- Lack of Flexibility: Annual budgets are rigid and cannot adapt to sudden changes in the business environment.
- Detail Overload: The level of detail required can be overwhelming, leading to disengagement among key stakeholders.
- Outdated Information: By the time an annual budget is approved, the data and assumptions it’s based on may no longer be valid.
- Misalignment with Strategy: Annual budgets often fail to align with long-term strategic goals due to their static nature.
- Misalignment with the Business Units: The budget is usually based on the chart of accounts, but many business units don’t run their business using COA terminology.
So why do we keep using the annual budget? Is it time that we re-examine this outdated process and ask ourselves, “is there a better way?”
The answer is yes, most likely! A more flexible and responsive approach is needed. Enter the rolling forecast. In this blog, we’ll explore why companies should move away from annual budgets and embrace rolling forecasts, along with key steps to make this transition.
What is a Rolling Forecast
A rolling forecast is a financial planning tool that allows organizations to continuously update their financial projections based on the most current information. Unlike traditional annual budgets, which are set once a year and often become outdated, rolling forecasts are regularly revised—typically monthly or quarterly—to reflect changes in the business environment and internal operations.
Key Features of Rolling Forecasts
- Continuous Update Cycle: Rolling forecasts are updated on a regular schedule, such as monthly or quarterly, to incorporate the latest data and assumptions. This ensures that financial projections remain relevant and accurate throughout the year.
- Extended Time Horizon: Instead of ending at the fiscal year, rolling forecasts extend beyond the current year. For example, if updated quarterly, a rolling forecast might always include the next 12 to 18 months, providing a longer-term view.
- Flexibility and Adaptability: Rolling forecasts are more flexible than static budgets. They allow organizations to quickly adjust their plans in response to market conditions, new opportunities, or unexpected challenges.
The Benefits of Rolling Forecasts
- Enhanced Agility: Rolling forecasts are updated regularly, allowing companies to respond swiftly to market changes and new opportunities.
- Continuous Planning: By revisiting financial plans regularly, rolling forecasts keep the company’s financial outlook current and relevant.
- Improved Accuracy: Frequent updates ensure that forecasts are based on the latest data and insights, leading to more accurate financial planning.
- Better Resource Allocation: Continuous updates help in making timely and informed decisions about resource allocation.
Resources:
Here are some of our earlier blogs on this topic.
Escaping the Budgeting Blues: Rolling Forecasts with IBM Planning Analytics
Rolling Forecast vs Budgeting - Let it Roll – We created this 7 years ago but still is applicable!
Conclusion
Moving from an annual budgeting process to rolling forecasts represents a significant shift in financial planning. However, the benefits—greater agility, continuous planning, improved accuracy, and better resource allocation—far outweigh the challenges.
We understand this shift is not easy. For some organizations, it might even be scary. But have no fear! Lodestar Solutions' next blog will share the steps to make this transition.
Call to Action
Ready to transform your financial planning process? Contact us to learn how we can help you implement rolling forecasts and drive better business outcomes. Services@lodestarsolutions.com
Be sure to check out all of our blogs here.
