A rolling forecast is a method of predicting future financial or business performance that continuously updates predictions by adding a period (e.g., a month, quarter) and dropping the oldest period. It essentially maintains a forecast horizon of a fixed length.
Understanding Rolling Forecasts
Unlike traditional annual budgets which are typically created once a year, a rolling forecast is constantly updated. This provides a more dynamic and accurate view of the future, allowing businesses to adapt to changing market conditions more effectively.
Key Characteristics:
- Continuous Updates: Forecasts are updated regularly (e.g., monthly, quarterly).
- Fixed Horizon: The forecasting period remains constant (e.g., always forecasting the next 12 months).
- Dynamic Adjustment: Incorporates the most recent actual data and market insights.
- Improved Accuracy: Offers potentially better predictions compared to static annual budgets, especially in volatile environments.
How Rolling Forecasts Work
- Initial Forecast: A forecast is created for a set period (e.g., the next 12 months).
- Periodic Updates: At the end of each period (e.g., month), the actual results are compared to the forecast.
- Adjustment and Extension: The forecast is adjusted based on the actual results and any new information. The oldest period is dropped, and a new period is added to maintain the fixed horizon.
Example:
Imagine a company uses a 12-month rolling forecast.
- January: They create a forecast for January to December.
- February: They review January's actual performance, update the forecast for February to December, and add a forecast for the following January (to maintain a 12-month view).
- This process repeats each month.
Advantages of Rolling Forecasts
- Better Decision-Making: Provides a more accurate and up-to-date view of the future, allowing for more informed decisions.
- Improved Resource Allocation: Enables businesses to allocate resources more effectively based on the latest forecasts.
- Enhanced Adaptability: Helps businesses respond quickly to changing market conditions and opportunities.
- Continuous Improvement: Encourages ongoing monitoring and refinement of the forecasting process.
- Increased Accountability: Makes managers more accountable for their forecasts and performance.
Disadvantages of Rolling Forecasts
- Increased Effort: Requires more time and resources than traditional budgeting.
- Potential for Over-Reaction: Frequent updates can lead to over-reacting to short-term fluctuations.
- Complexity: Can be more complex to implement and manage than traditional budgeting.
When to Use Rolling Forecasts
Rolling forecasts are particularly useful in:
- Fast-growing companies.
- Industries with rapid technological change.
- Volatile market conditions.
- Companies with a strong focus on performance management.
In conclusion, a rolling forecast offers a dynamic and adaptive approach to predicting future performance, providing significant advantages in volatile and rapidly changing environments by ensuring a continuous and up-to-date view of the future.
