Lean Finance and Operations

How to Create a Rolling Forecast (and Why It Beats Annual Budgets)

If your company still relies solely on annual budgets, you may be missing out on a more effective way to plan: rolling forecasts. Unlike traditional budgets, which are set annually and often become outdated quickly, rolling forecasts are updated regularly. They provide a clear view of the future and enable you to respond to market or business changes quickly.

What Is a Rolling Forecast?

A rolling forecast is essentially a financial plan that progresses continuously. Instead of looking at January to December once a year, it always projects 12 or 18 months ahead. It updates as new information becomes available—such as sales numbers, expenses, and market changes—so your plan remains current. Think of it like a GPS for your business: you’re always looking ahead to avoid bumps in the road.

Step 1: Decide How Far Ahead to Plan

Most companies start with a 12-month forecast. Some go as far as 18 months. The key is to have enough visibility to make decisions without making the forecast so long that it becomes unrealistic.

Step 2: Identify Your Key Drivers

Every business has factors that drive results, including sales, pricing, production costs, labor, and overhead. Knowing these lets you build a model that reacts when things change. For instance, if raw materials get more expensive, your forecast should immediately show the impact on profits.

Step 3: Use Real-Time Data

Rolling forecasts are only useful if they reflect reality. Pull in data from your accounting systems, sales reports, or ERP software. The more current your data, the more accurate your decisions will be.

Step 4: Update Regularly

The key difference from an annual budget is frequency. Most companies update forecasts monthly or quarterly. Regular updates enable managers to act early, rather than waiting until the end of the year to realize there’s a problem.

Step 5: Focus on Actionable Insights

A forecast is not just numbers—it’s a tool for decisions. Use it to plan for growth, allocate resources, or adjust spending. Instead of comparing actuals to last year’s fixed budget, you can make choices based on what’s actually happening in the business.

Why Rolling Forecasts Beat Annual Budgets

• Flexibility: Annual budgets are fixed; rolling forecasts adapt as the business changes.
• Accuracy: Updated forecasts reflect real performance, so you’re making decisions based on facts, not old assumptions.
• Strategic Focus: Forecasts show where your business is heading, helping managers focus on growth rather than just cutting costs.
• Risk Management: Early visibility into trends enables you to address issues before they escalate into significant problems.
• Team Collaboration: Rolling forecasts often involve sales, operations, and finance teams working together to create better alignment across the business.

Tips for a Successful Rolling Forecast

• Start with one area of your business before expanding to others.
• Keep it simple—focus on the drivers that really matter.
• Share the forecast widely so the latest numbers inform decisions.
• Stick to a regular update schedule.

Conclusion

Rolling forecasts give companies an ongoing view of their financial future. By regularly updating plans, you can react more quickly to changes, make more informed decisions, and stay ahead of potential risks. For businesses that want to be agile and proactive, rolling forecasts are a far better choice than sticking to a rigid annual budget.

References:

1. Horngren, Charles T., Sundem, Gary L., & Elliott, John A. Introduction to Financial Accounting. Prentice Hall, 2013.
2. Haka, Susan F., & Heitger, Darren L. Management Accounting. McGraw-Hill Education, 2012.
3. Drury, Colin. Management and Cost Accounting. Cengage Learning, 2018.