The first piece in a short series on rolling reforecasts.
In a recent article
by Mary Driscoll, a senior research fellow at the not-for-profit business research firm APQC, she writes, “Only 50% of organizations currently use rolling reforecasts.” Notice the inclusion of the word “only” in that sentence; betraying the unspoken expectation of most of us that more companies should be using rolling reforecasts to manage their financial performance in such turbulent times as these.Call me a sceptic, but personally, I doubt whether the real figure is as high as 50%. There are the three reasons that lead me to such a view. First, it is inevitable that all surveys have an element of bias, and here I suspect that some respondents may have felt obliged to give a positive answer to the question simply because rolling reforecasting is widely recognized as a best-practice methodology. I am not questioning the rigour of the research here—APQC do quality work far removed from the vox-pop surveys that are designed simply to generate headlines.Then there is the confusion that arises from the fact that there is no universally accepted definition of what constitutes a rolling reforecast. Most research suggests that while the majority of companies aspire to reforecast on a monthly basis, few actually achieve that goal and reforecast less frequently. Therefore, within the 50% that are reporting they use rolling reforecasts, there will be companies reforecasting quarterly and bi-annually. In light of recent fluctuations in exchange rates and oil prices, the idea of a twice-yearly rolling reforecast is perhaps something of a misnomer.Finally, there is the question of who is doing the reforecasting. Although one might assume that every budget contributor is involved in each reforecast, in my experience this is not always the case. Sometimes senior members of the finance team are responsible for reforecasts, making amendments to revenue lines and key line item expenses based on recent trends. Colloquially, these are often referred to as “burn rates.” While this is far from ideal, one could argue that it is preferable to not reforecasting at all.Before I commit myself to what I suspect is a more realistic figure for the proportion of companies using rolling reforecasts, let me share my view of what constitutes a rolling reforecast.The essentials of rolling reforecasting
Let us not forget that reforecasting the future is not a goal in itself; it is taking actions to influence it that matters. These fall into three broad areas, based on their immediacy:
- Short-term actions, such as realigning resources and capacity with fluctuating demand, that will help the company achieve the current year’s financial objectives.
- Medium-term actions that senior executives may need to take to manage market expectations and avoid earnings warnings that could damage their stock price.
- Longer-term, strategic actions to address any emerging performance gaps against competitors.
Exactly what form rolling reforecasts need to take to provide this action-orientated insight depends of many factors, including the level of uncertainty inherent in a particular market and the proportion of a company’s expenses that can be controlled in the short term. Today, many companies are aiming towards rolling monthly reforecasts, while others in sectors such as retailing are already using weekly forecasting. Ultimately, as long as a company has the capability to reforecast with the frequency it desires, it does not really matter what that frequency is. Neither does it matter how far companies forecast into the future. Most tend to forecast on a rolling 18-month time scale, the rationale being that once they get half way through the current year, they have full visibility into the next fiscal year. However, companies operating in sectors that require large capital investments typically forecast on far longer time scales. The main thing is that a reforecast extends beyond the FP&A team and becomes an enterprise-wide activity, so that those responsible for revenue generation and expenditure can collaborate around a shared set of data.If we accept such a definition alongside my earlier reservations, I would suggest that probably no more than a third of companies actually use rolling reforecasts today. Why is this so low? In my experience it is because most reforecasts involve reworking the annual budget. In such a situation, moving to rolling quarterly reforecasts means doing four complete budgets each year and four times the workload. That is unacceptable to most managers, which is why the FP&A team inherited the process.However, there is a better approach, and I will explore that in the next post in the series.