Updated July 10, 2023
Definition of Rolling Forecast
The organization uses the rolling forecast as a financial model and management tool to forecast the plan over a certain period, from monthly to semi-annually. It enables them to adapt to the dynamic business environment by adjusting their business plans and targets according to market trends.
Explanation
As the business environment is unpredictable and dynamic, it changes over time as per the demand and supply conditions in the market. So, business organizations must plan and change the policies per the industry’s business environment. The management tool enables the organization to continuously plan per the business environment by planning and redefining the targets, rules, manner of work and technology, etc. It differs from the traditional annual forecast approach as it involves continuous planning. Doing a rolling forecast actively updates the budgets and targets of the organization with the industry conditions and market responses to the particular product, providing the main benefit. It can save the organization from suffering losses because of its continued involvement and re-planning nature.
Steps for Rolling Forecast
- Step 1: The first step is to identify the business goals or objectives because the organization’s decisions, as per the rolling forecast theory, impact various individuals, such as investors, who depend on the clarity of goals and objectives.
- Step 2: After gaining clarity about goals and objectives, the next step involves identifying the business and industry environment to determine the time limit for the rolling forecast.
- Step 3: If the business and industry environments are closely aligned, the rolling forecast time limit can be set quarterly or semi-annually. However, suppose the business environment is unable to adapt or is less responsive to the industry environment. In that case, the rolling forecast time limit may also need to be set at a monthly interval.
- Step 4: After deciding the time limit for the forecast, the next step is to determine whether to conduct the forecast on the surface or in-depth. It depends upon the nature of the industry and the nature of changes in the business environment.
- Step 5: Decide the team involved in the forecast: The team involved in it plays an important role in a business environment. So, the team must be competent enough to recognize opportunities from the market conditions, even in the worst cases.
- Step 6: Deciding on key elements for a rolling forecast is necessary to grow faster, as the changing environment does not affect all budget elements.
- Step 7: Assessment of outcomes: Assessment of outcomes due to the rolling forecast and what if the analysis is necessary to implement the rolling forecast.
- Step 8: Compare actual performance to the rolling forecast: Tracking actual performance and expected performance is a must for management to decide whether a rolling forecast is to be implemented.
Example of Rolling Forecast
ABC Ltd. made the annual forecast cash budget for the financial year 2020-2021, Which is shown as under:
|
Amount ($) |
||
| Cash Receipts | Cash Payments | |
| Mar-20 | 7,500.00 | – |
| Apr-20 | 5,000.00 | 3,500.00 |
| May-20 | 4,000.00 | 1,700.00 |
| Jun-20 | 4,500.00 | 5,600.00 |
| Jul-20 | 3,800.00 | 2,500.00 |
| Aug-20 | 4,900.00 | 4,200.00 |
| Sep-20 | 3,400.00 | 3,900.00 |
| Oct-20 | 5,200.00 | 5,500.00 |
| Nov-20 | 6,200.00 | 4,700.00 |
| Dec-20 | 5,800.00 | 6,200.00 |
| Jan-21 | 6,400.00 | 4,300.00 |
| Feb-21 | 5,900.00 | 4,700.00 |
| Mar-21 | 7,100.00 | 8,100.00 |
| 69,700.00 | 54,900.00 | |
The organization does a Rolling Forecast of the monthly cash budget as cash is the liquid asset required for business operations. Due to the country’s sudden lockdown, the organization cannot receive the receipts from March onwards, and the cash cycle is expected to be delayed by two months. However, the organization will make 50% of the payments in the month due, and the balance will be 50% after two months. For example, out of the $ 7,500 receivables in March, $ 5,000 was received, and the balance will be receivable after two months. Therefore, draw the Rolling Forecasts of the cash budget for the month from Mar 2020 to Sept 2020.
Solution:
All Receipts get delayed by two months, except in March; out of $ 7500, $ 5000 has been received. Therefore, 50% of the forecasted payments are made due in the month of payment itself, and the balance is 50% after two months. So, the Rolling Forecast from March 2020 to September 2020 is as under:
| Amount ($) | ||
| Cash Receipts | Cash Payments | |
| Mar-20 | 5,000.00 | – |
| Apr-20 | – | 1,750.00 |
| May-20 | 2,500.00 | 850.00 |
| Jun-20 | 5,000.00 | 4,550.00 |
| Jul-20 | 4,000.00 | 2,100.00 |
| Aug-20 | 4,500.00 | 4,900.00 |
| Sep-20 | 3,800.00 | 3,200.00 |
Why are Rolling Forecasts Valuable?
It is valuable because of the following reasons:
- It enhances the organization’s performance by prioritizing continuous and future planning.
- The organization can cope with the changing business environment and the competition in the industry.
- With Rolling forecasts, the chances of heavy loss are less as the organization may act as per the changing environment.
- With the changing environment in business, it is necessary to do a periodical analysis of the industry demand and response, which helps in strategic planning.
Benefits of Rolling Forecast
- It helps manage the business risk as it adapts to changing industry conditions.
- With the rolling forecast, implementation of the financial planning gets better as the business will start planning as per the changing business environment.
- The company can identify the areas that need more attention if a rolling forecast is implemented, and accordingly, it can devote more time to improvement in that area.
- It helps the organization to respond more quickly to the continuously changing business environment.
Disadvantages
- As the organization continuously changes the budgets per changing business environment, the long-term financial planning, budgets, and objectives also need to change, which may create a hurdle in achieving the long-term objectives and goals.
- Creating rolling forecasts at particular intervals requires more time; hence, it is time-consuming.
- As the business environment continuously changes, the organization will always face variances, and the rolling forecast budget cannot be made as perfect and accurate.
Conclusion
It is a management tool for changing the financial budgets per changes in the business environment. As the business environment is dynamic, the organization must cope with surviving in the long run. So it helps the organization in increasing efficiency and financial planning. But simultaneously, as the environment changes continuously, so does the rolling forecast, which consumes more time and creates hurdles in achieving the organization’s long-term financial and other goals.
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