By Chris Mennel Due to the fast-paced culture that companies now operate within, annual budgets could become a thing of the past. Rolling forecasts have gained in popularity due to their ability to adapt to changing circumstances and show an updated picture of the future with only a few clicks of the mouse.
Not many accountants, especially the ones that preach budgeting to everyone that will listen, would tell you to stop creating an annual budget. But, perhaps, instead of creating an annual budget that will be outdated a couple months or even weeks from now, a better solution for your company or organization could be a rolling forecast; a tool that can be referenced regularly and remain useful throughout the entire year.
Rolling forecasts are quickly becoming popular in our fast-paced society. In order to keep up with constant changes in their businesses, leaders are finding that they need to update their forecasts numerous times throughout the year to keep them relevant. They want to know what their year is going to look like from both a top-line and a bottom-line perspective at all times, and not just how they compare to budgeted figures they created six months ago.
Budgets have long been used to manage for-profit companies as well as nonprofit organizations. Following is an example that shows how a rolling forecast can be beneficial:
Say a manufacturing company lands a large new client and they bid the work based on their current labor costs. Everything should be fine, but what if the extra work load is going to require a second shift. Their labor costs were accurate based on their initial annual budget, but a properly designed rolling forecast could quantify the man hours needed for the extra work and compare that to the current available labor force to identify the need for a second shift. With this type of model, the company could factor in all of the costs that come with setting up a second shift before they even bid the new work. And better yet, the model can be set up to also generate a forecasted balance sheet, so a company can determine its cash flow needs before they arise.
In a typical rolling forecast, a company’s balance sheet and income statement are forecasted on a monthly basis (similar to an annual budget). This is helpful because it still allows companies to prepare “budget to actual” monthly reports. However, in a rolling forecast, everything that can possibly be formula-driven is set up that way from the beginning. Then only a few inputs have to be tweaked in order to create a new, more accurate forecast on a weekly or monthly basis. So the “budget” part of the “budget to actual” reports becomes a dynamic set of data that reflects the company’s more-recent and updated expectations.
Our clients that have implemented this type of system have found that in the beginning, forecasting is just as hard as budgeting. But within a relatively short period of time, the forecasts become more accurate and the differences between the forecasted and actual results get smaller and smaller. This type of accuracy allows for better predictions of where a company is heading resulting in a better way of preparing for the future.
If you would like to find out more about implementing a rolling forecast in your company or organization, contact Chris Mennel, Audit Manager for Alerding CPA Group, at (317) 569-4181 ext. 260 or firstname.lastname@example.org. Alerding CPA Group is an Indianapolis-based public accounting firm. Visit our website: www.alerdingcpagroup.com.
This post was written by:
Christopher Mennel, CPA
Chris oversees audit and accounting services, not-for-profit and consulting services. Chris’ specialties include manufacturing, distribution/wholesale, retail, health and welfare, service and civic organizations. Chris also prepares financial statement projections and other financial analyses.
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