Every business starts the year with a detailed budget, carefully crafted from last year's numbers and expectations for the future.
But as the months go by, reality often throws a few curveballs: supply chain hiccups, sudden market trends, economic downturns, and unexpected moves by competitors.
As a result, sticking to that static budget becomes nearly impossible. This is where the dynamic method called rolling forecasts comes in handy.
In this blog, we'll explore the definition of a rolling forecast, its benefits, and how sales forecasting software can help you stay ahead.
What is a Rolling Forecast?
Rolling forecasts offer your business a flexible way to manage finances. Unlike traditional annual budgets, which are set in stone, rolling forecasts use past data to predict future outcomes and are updated regularly throughout the year.
By planning four to six quarters ahead and regularly updating your forecasts, you keep your business agile and ready for new challenges and opportunities. This makes rolling forecasts a great alternative to traditional budgets.
Here's a quick comparison between static forecast and rolling forecast meaning:
| Factor | Rolling Forecast Definition | Static Forecast Definition |
|---|---|---|
| Basis of Planning | Combines actual year-to-date results with new projections | Based on last year’s performance |
| Update Frequency | Monthly or Quarterly | Once a year |
| Flexibility | Dynamic and continuously updated | Fixed budget assumptions, minimal adjustments |
| Adaptability | High, adjusts with current data and trends | Low, doesn't account for real-world changes |
| Forecast Period | Extends 4 to 6 quarters into the future | Typically one fiscal year |
| Responsiveness | Fast, regularly adapts to new information | Slow, difficult to adjust mid-year |
| Data Used | Recent data from past few months along with historical data | Historical data from the previous year |
Reasons to Use a Rolling Forecast
If you're unsure about transitioning from a static budget to a more flexible rolling forecast, below is a sample scenario that can help illustrate why making the change could be beneficial:
Imagine a company that sells high-end electronics. The tech company typically sets an annual budget at the beginning of the fiscal year, but this year, they decided to adopt a rolling forecast to better manage their finances and performance gaps.
Initial Data (January):
- Sales (last year): $12 million
- Marketing Budget: $1.2 million
- Operational Costs: $2.4 million
- Expected Growth Rate: 6%
January Forecast:
| Metric | January Forecast |
|---|---|
| Projected Sales | $12.72 million |
| Marketing Budget | $1.32 million |
| Operational Costs | $2.52 million |
Rolling Forecast Implementation (March Update):
- Actual Sales (Q1): $2.8 million (below expected $3.18 million)
- New Market Trend: Increased demand for smart home devices
- New Competitor: Launching similar products at lower prices
Updated Forecast:
| Metric | January Forecast | March Forecast |
|---|---|---|
| Projected Sales | $12.72 million | $12.4 million |
| Marketing Budget | $1.32 million | $1.5 million |
| Operational Costs | $2.52 million | $2.52 million |
In this scenario, the tech company used a rolling forecast to adapt its plans when Q1 sales fell short of expectations in March. Initially, they projected Q1 sales to be $3.18 million (25% of the annual forecast). However, actual sales came in at $2.8 million.
As a result, they adjusted their annual sales projection from $12.72 million in January to $12.4 million in March. This demonstrates the flexibility of rolling forecasts to respond to new data, enhancing the accuracy of financial planning and resource management.
Now, let’s look at how rolling forecasts have empowered the tech company to adapt and thrive:
Comprehensive Financial Planning
The tech company combined detailed historical sales data with insights into market trends and competition to shape its financial strategies.
This budgeting approach ensured decisions were well-informed, taking into account current market dynamics.
For instance, they initially planned $1.32 million for the marketing budget but adjusted it to $1.5 million by March due to rising demand for smart home devices and new competitors.
Enhanced Accuracy in Projections
Regular updates to rolling forecasts allowed the tech company to adjust sales and revenue forecasts promptly based on real-time business performance.
Initially aiming for $12.72 million in annual sales with 6% growth, they revised projections to $12.4 million by March, aligning with actual Q1 sales of $2.8 million.
This flexibility ensured their financial forecasts were realistic and up-to-date, avoiding the limitations of static budgets.
Better Investor Communication
Transparent updates to rolling forecasts can provide investors with clear insights into financial performance and strategic decisions.
For example, updating projections from $12.72 million to $12.4 million in March, supported by Q1 performance and increased marketing spend, can boost investor confidence.
This open communication demonstrated the company's ability to navigate market changes and capitalize on growth opportunities effectively.
Strategic Growth Management
Using rolling forecasts as a tool for strategic growth management allowed the tech company to monitor market trends closely and allocate resources strategically.
Adjusting Q1 sales projections from $3.18 million to $2.8 million prompted strategic increases in marketing spending to $1.5 million.
This proactive approach positioned them to seize opportunities and manage risks promptly, ensuring sustainable growth in a competitive tech industry.
How to Create a Good Rolling Forecast?
By mastering the steps in creating a rolling forecast, you can cultivate a proactive approach to financial management and respond to market changes–no matter your industry.
Here are five simple steps to keep in mind:
Step #1: Start by collecting reliable historical data, including past sales performance, expense reports, and market conditions. This data provides a solid foundation for your forecast and helps identify trends that can inform future projections.
Step #2: Ensure that your financial reports are updated frequently with the latest data available. This ongoing process keeps your forecast relevant and accurate. Update sales forecasts, expense budgets, and other financial metrics monthly or quarterly to reflect current business conditions.
Step #3: Continuously track your company's actual performance compared to the forecasted figures. Monitor key metrics like sales revenues, expenses, and profitability. This monitoring helps identify deviations early, allowing for prompt adjustments to your forecasts and financial strategies.
Step #4: Base your forecasts on realistic assumptions about market trends, economic indicators, and internal business factors. Consider factors such as customer demand, competitive landscape changes, and economic forecasts when making projections.
Step #5: Remain agile in responding to changes in the business environment. Evaluate the accuracy of your forecasts regularly and make adjustments as necessary based on new data and insights.
Pro Tip: Use QuickBooks Cash Flow Planner for quick and comprehensive cash flow forecasting and scenario planning. With a few clicks, you can understand your business's financial health, generate cash flow statements, share reports, and run what-if scenarios — all within minutes.
Conclusion
It's crucial to grasp what cash flow forecasting is in order to optimize financial strategies. Rolling forecasts are a game-changer across industries, offering a dynamic tool to stay ahead in today's fast-paced markets.
By updating forecasts regularly, businesses can swiftly adjust strategies based on the latest insights, ensuring they remain agile and responsive to shifts in demand, competition, and economic conditions.
Ready to forecast your future success? Sign up for a free trial of sales forecasting software from Cash Flow Frog today.
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