Rolling Forecast

Definition of Rolling Forecast

Rolling Forecast is the type of financial model and management tool which enables the organization to forecast the plan over a certain period ranging from monthly to semi-annually, and it is done to cope with the dynamic business environment by changing the business plans and targets as per the 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 as 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. The main benefit of doing a rolling forecast is the budgets and targets of the organization will get updated with the industry conditions and market responses to the particular product. It can save the organization from suffering losses because of its continued involvement and re-planning nature.

Steps for Rolling Forecast

Different steps are mentioned below:

• Step 1: Identifying the business goal and objectives: The first step is to identify the business goals or objectives as clarity about goals and objectives is necessary for rolling forecast, and there are many persons like investors, etc., depending upon the decisions made by the organization as per rolling forecast theory.
• Step 2: Identify the business and industry environment: After getting clarity about goals and objectives, the next step is to identify the business and industry environment to determine the time limit under which the rolling forecast is to be done.
• Step 3: Determine the time limit for rolling forecast: If the business environment and industry environment are on hand in the hand position, then the time limit for rolling forecast can be quarterly or semi-annually; otherwise, in case the business environment is not able to cope up, or it is less responding with industry environment the time limit for rolling forecast might be monthly also.
• Step 4: Determine the nature of the Forecast: After deciding the time limit for the forecast, the next step is to determine the nature of the forecast, i.e., whether the forecast is to be done 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 Rolling Forecast 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: Determine the key elements for the forecast: With the changing environment, not all elements of the budget get affected. Hence deciding on key elements for rolling forecast is necessary to grow faster.
• 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, 50% of the payments will be made by the organization in the month due, and the balance of 50% after two months. For example, out of $ 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

Some of the Benefits are explained as under:

• 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

Some of the Disadvantages are explained as under:

• As the organization is continuously changing the budgets as 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 forecasts 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 needs to cope with surviving in the long run. So it helps the organization in increasing efficiency and financial planning. But at the same time, 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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