I’ve been tasked at work to come up with an 18 month rolling forecast. I think several companies have moved or are moving to a rolling forecast methodology. It’s far more accurate than budgeting once a year, and it can be used as a management tool.
I believe that most companies do not budget properly. Budgeting is that once a year painful exercise where people are asked to submit expense budgets based on some high level revenue target (usually without many objectives for how the revenue will grow), budgets submitted lead to an EBIT (earnings before interest and taxes) that’s far too low, management adjusts income statement from a high level, finance cuts expenses, budget managers hate finance, and the budget is fairly useless 1-3 months into the year.
Sound familiar?
Well, rolling forecasting is a more useful exercise that involves the same people, provides more information, and replaces that painful thing described above. Rolling forecasting, if done correctly with the right process, provides managers with sufficient information to make predictions about the future, and then constantly re-evaluate those decisions to determine what needs to change.
For example, looking at the trend for the top 50 customers that make up 85% of the revenue, the VP of Sales forecasts the revenue for each of those customers for the next 6-12 months by month. The next 1000 customers that make up 15% of the revenue get lumped into one bucket.
When a month passes, sales reviews customer revenue, calls on the customers that are lagging behind, and re-evaluates the next few months. This simple process has created an action oriented framework for calling on customers. Add more details such as products purchased by customers, and you can see how the conversation with the customer changes.
Now, forecast costs, expenses, inventory, etc… You can see how valuable the conversations can be based on prior predictions. These conversations will happen internally at executive meetings as well as externally with suppliers and customers.
If you don’t do rolling forecasts, seriously consider starting. If you need tips, post em here or email us!