Have you ever spent hours planning your budget for the upcoming financial year? Only for unexpected costs and opportunities to make it irrelevant? Many businesses share a common frustration: traditional budgeting lacks flexibility. This post will look at a financial tool that helps with this problem: Rolling Forecasts. Learn how this financial tool can give your business the flexibility to succeed in a changing economy. Let’s start with Rolling Forecasts vs Fixed Budgets.
The Traditional Approach: Fixed Budgets
A fixed budget is a financial plan that usually covers 12 months. It displays the expected revenues and expenses. These figures stay the same, no matter how performance or market conditions vary. They work best in stable environments where revenue and customer bases stay consistent.
Two important challenges of budgets
- Limited flexibility: Traditional budgets are often rigid, causing missed opportunities and short-term focus. They last a year and serve as performance and financial goals benchmarks. Even if market conditions change, businesses may still try to reach these old targets.
- Inaccurate Forecasting: A budget comprises educated guesses about future revenue and expenses. These forecasts often fail to align with the business’s actual performance, leading to inefficient resource use. If a company thinks demand is higher than it is, it may have too much inventory and incur additional costs.
Embracing Flexibility: Rolling Forecasts
Adaptability is crucial for dynamic environments where change is frequent and unpredictable. Enter the rolling forecast. It’s a strategic tool that helps adapt to the changing business environment. Rolling forecasts differ from static budgets because they update throughout the year. This helps them keep up with the latest data and trends. Additionally, they include real-time spending adjustments depending on actual outcomes, limiting surprises.
The frequency of Forecast updates depends on your industry and the size of your entity. If you’re a R60mil+ revenue per year marketing agency with Public Entities as clients, you’ll be reforecasting every day/week as your project briefs change daily.
If you’re a travel agency with peak seasons during your year, you’ll probably reforecast every quarter as your pipeline closes before travel dates.
This method helps us make quick decisions and align our resources with our goals. This forward-thinking method gives instant insights into a company’s future finances. It offers a clear view that can lead to better results. The COVID-19 pandemic and recent U.S. tariffs show how fast market conditions can shift. Many businesses now abandon rigid plans. They adopt rolling forecasts to stay flexible and make quicker, smarter decisions.
For example, in June 2023, a manufacturing company’s fixed budget projected a 12% profit margin for the year. But after unexpected tariffs were introduced in August, material costs surged, shrinking that margin to just 4% overnight. A rolling forecast would’ve allowed them to adjust course in real time, instead of scrambling to react months later.
Key benefits of rolling forecasts include:
- Adaptability: Regular updates based on actual performance keep forecasts relevant and never outdated.
- Proactive Management: Staying updated helps businesses face challenges and seize market opportunities quickly.
- Industry Agility: Rolling forecasts help companies quickly update financial projections based on changing market conditions. The tech industry shows why rolling forecasts matter. It needs to adapt fast to market changes and new technology.
When to Use Each Approach
Fixed budgets work best for organisations in stable and predictable environments. They help maintain strict cost control. Government entities have steady funding and predictable costs. By using fixed budgets, they can gain clarity and control.
For example, if you’re in consulting and have set retainers that aren’t going anywhere, just go for a fixed budget. A rolling forecast won’t benefit you or your organisation as there’s little to no volatility.
But for growing businesses? “The transition from fixed to rolling forecasts always starts with mindset,” notes Chloe Sloane, CCFO’s Senior Financial Manager. “Clients who succeed are those who stop treating budgets as carved-in-stone targets and start seeing forecasts as living tools. The biggest mistake? Ignoring your accountant when they say it’s time to pivot.”
Rolling forecasts are sound in fast-changing industries. They help new companies manage uncertain revenue and shifting KPIs. In this case, a budget created six months ago can quickly become irrelevant. If you’re curious to learn more, we have a blog on Understanding Key Performance Indicators, which we highly recommend reading!
What should I do now? Should I stop budgeting?
There’s a reason the saying ‘those who fail to plan, plan to fail’ is so popular. Planning ahead is essential. Due to market changes and shifting business priorities, budgets can become outdated quickly. It’s not about replacing your budgets but rather about making them bulletproof.
The Hybrid Approach
Many organisations thrive using a hybrid approach. They mix fixed budgets’ stability with rolling forecasts’ flexibility, which helps them balance control and adaptability. The fixed budget is the target. The rolling forecast ensures that all current and relevant information is included. Real-time data helps organisations set better financial targets when making new budgets. Rolling forecasts improve budget reliability through the continuous refinement of projections.
A strict budget can keep an organisation from adapting and growing in today’s fast-paced business world. Remembering that planning should not come at the cost of adaptability is essential. Budgets are important for setting expectations. Yet, they derive their real strength from being used with rolling forecasts. Embracing flexibility in our financial strategies helps us find new opportunities. It also helps us break limits and lead our businesses to lasting growth and new ideas.
What We Use to Forecast
Our tech stack includes an API integration with Xero via G-Accon for more accurate forecasting, making updating actuals in a forecast model a breeze. This setup allows us to focus on forward-looking insights rather than spending time updating historical data. If you’re curious, here are the fundamentals of understanding Xero.
If your forecast data is organised correctly in a spreadsheet, like Google Sheets, it can be transformed into an impressive Looker dashboard.
Automating the updating of actuals in your forecasted model is even more efficient. This process has allowed clients to adjust their forecasts successfully as new information becomes available. It also helps our clients stay on top of their revenue pipeline. The closer clients are to their pipeline, the better they can help with revenue forecasting assumptions.
Questions To Ask Yourself About Forecasting:
- What is the most common mistake clients make when they create forecasts?
- What are the biggest challenges clients face when trying to forecast accurately?
- What strategies have you seen clients use successfully to improve their forecasting accuracy? Are there any tools you recommend to clients for better forecasting?
- What processes do successful clients have for adjusting their forecasts as new information becomes available?”
- Can you explain how accurate forecasting has positively impacted a client’s business?
In Summary
Your financial strategy needs to evolve with a constantly changing world. Rolling forecasts don’t replace budgeting but rather enhance it. By merging structure with flexibility, businesses can stay grounded while moving forward. Embrace the hybrid approach and give your planning the adaptability it needs to thrive!
