As the end of each and every year is winding down, like clockwork, CFOs endure the same time-consuming process - starting the annual budget. The CFO distributes budget worksheets to be completed by department heads, then the worksheets are inevitably returned with "sandbagged" revenue projections, inflated department expenses and capital expenditure requests, for the upcoming fiscal year.  After several rounds of "back and forth" between the CFO and department heads, the arduous budgeting process is complete.  Depending on the size of the company, this process could take weeks, or even months, to complete.  The extensive amount of time it has taken to complete the budget has now transformed it into no more than a historical document that was based on assumptions which are no longer relevant. The budget now becomes a window to the past, instead of a guide to the future.  The approved final budget is now "cast in stone" and used by companies as a benchmark for making critical business decisions, determining incentive bonuses, and key staffing decisions.

With the pace of business becoming faster now more than ever, the rise in technology, changing regulation, and access to more relevant data, companies realize the importance of flexibility, the need to quickly adjust to new market conditions and changes in consumer demands.  Companies must now make decisions based on real-time data and opportunities, and less by a historical budget document completed approximately one year earlier. This need for agility is fueling companies to transition from formal budgets to rolling forecasts.  A rolling forecast, also called continuous planning, is a process that continually adapts to changing economic conditions and enables companies to make business decisions by focusing on KPIs (key performance indicators), or business drivers over a fixed number of future periods.  These future periods are determined by how far into the future a company can reasonably forecast.  Alternatively, a rolling forecast is not a budget plus "x" number of months, or a mathematical exercise.  It takes actual financial performance, plus updated and more relevant market, sales and other business assumptions, to forecast the company's financial performance, on a monthly, quarterly, or other regular basis, allowing the forecast to revise itself based on the most recent results.  It becomes a "living, breathing document" and it is more in tune with current business conditions.

Some companies are now using rolling forecasts in tandem with a traditional budget.  Rather than locking into an annual budget, companies now use quarterly financial results to update a 15 month outlook.  If sales are trending down due to unanticipated market forces, then the rolling forecast would make adjustment for sales decreases, then they would revise forecasted costs and expenses, resulting in updated forecasted EBITDA (earnings before interest, taxes, depreciation and amortization).  Management is now in a better position to make decisions based on real time opportunities and risk; where-as, the traditional budget would indicate unfavorable revenue variances, with the same unadjusted expense line item budget.  Since there is a ceiling on budgeted expenses, companies will not spend more, but under most circumstances, they will not spend less than the budgeted expenses.

1. Achieve Buy-In: Start the transition to rolling forecasts by convincing upper Management and the Board of Directors.  Upper Management and the Board are accustomed to approving top level financial information, for example total revenues, EBITDA, etc.  However, financial performance must be aligned with key business drivers and the company's strategic objectives.  So, in Upper Management's viewpoint, to go to a rolling forecast would not be that significant of a change.  The more difficult negotiation will be with the finance staff and department heads.  The finance staff will be uncomfortable with switching their mindset from the traditional annual budgeting process to something new.  The rolling forecast process will be spread out throughout the year, but will be more accurate.  On a routine basis, Department heads will have to start addressing revenue trends, and expense monitoring, which will keep department heads "on their toes" as they adapt to change.  The fluid nature and better visibility provided by rolling forecasts will break down spending silos across departments.  Trust must be built among the other department heads by communicating how the change will benefit the overall organization.
    
2. Implementation:  A rolling forecast is a reality check, it is not a process for adjusting numbers just to meet a target.  For the process to be successful, department heads have to take ownership and provide unbiased data.  Wider involvement will ensure that decision makers gain a more accurate picture of the current condition and future outlook.  Rolling forecasts work on multiple budget assumptions and iterations, and depend on timely integration, analysis and interpretation of information to ensure meaningful business decisions.  It is important to deploy robust technology that supports KPI based forecast modeling.  Instead of multiple Excel spreadsheets which roll into the full budget, the software technology should be able to forecast and account for a variety of scenarios.  Including revenue growth percentages and expense fluctuations forecasted to 12 - 24 periods ahead.
    
3. Refinement: Persuading department heads to stop padding their budgets could take some time, the right approach is to train the department managers and show that they can be trusted.  Let them know that requests for funding or resources, based on current conditions and targeted toward delivering outcomes, will be honored, and they are less likely to make arbitrary additions to their budget.  Also, organizations should create a change management policy to embrace and drive process change.  The change policy should explain that the rolling forecast initiative is a reality check to explore profitability opportunities, as well as the knowledge sharing and training programs required to adapt to new processes and technology.

Research by the American Productivity & Quality Center shows that companies employing rolling forecasts save between 5 and 25 days each year in their budgeting process. Rolling forecasts force business units to more closely track spending, which means there is more continuous monitoring than in the traditional budgeting model.  Still, this model, according to those who have eliminated or trimmed detail from their annual budget, creates time savings for departments, which can now spend more time focusing on driving value.

*Albert is a licensed Certified Public Accountant (CPA) in the State of Maryland