Rolling Forecasts: Chris Ortega Explains the Why, What and How

What’s one trait that Finance departments in leading companies have in common? Rolling forecasts. Based on the results of our global survey of over 500 finance leaders, companies using rolling forecasts are more likely to outperform those using quarterly forecasts, especially in their capacity to update the forecast quickly. Shifting from a quarterly to a rolling forecast can seem daunting, especially when you’re trying to sell it to the C-suite. Or even your own team, for that matter. To help you get started with the changes in processes, procedures and technologies, we spoke to Chris Ortega, a World's Top 10 Voice in Accounting, Finance, and F&PA. Read on to learn more.

What is a Rolling Forecast?

With a rolling forecast, you continually inch the time horizon forward. A typical approach to rolling forecasts is to add one month to the end of the forecast with every month that passes. "It's using the most up-to-date information that you have in your business to look forward," Chris explains. The benefit is that you're always looking out the same number of months — and the data is continually updated based on the latest intel available to an organization.

Benefits of Rolling Forecasts

Chris says that rolling forecasts help with "informing the business on what is happening in reality, changing the outlook that we're seeing on the 6-, 12-, and 18-month horizon of the business." Rolling forecasts also provide a perspective on current business operations. Chris explains this as ".. the ability to be able to connect, where we see the business going to what we are executing today."

Find a Technology That's Configurable

According to Chris, the best technology for rolling forecasting doesn't have to be tailored-made to your business. "I always think the most important thing is to make sure you're finding the technology that best meets your business needs," he says. "Too many times I see organizations and teams across a lot of different industries try to have their processes fit a technology." "You're not always going to have the processes and procedures and data points to match a technology fully to your business," Chris explains. "That is the fundamental fallacy a lot of accounting and finance teams make when they go about implementing a rolling forecasting technology ... They try to customize the technology to fit their business." Chris thinks this makes the process more complicated than it needs to be. He notes that software companies spend a lot of time ensuring that their technology will work across businesses. "They've seen it. They've done it. They've been in different industries. So, try to find a technology that is configurable to your business, not customized to your business." Chris also recommends you do research with trusted sources like TrustRadius and G2: "It really gives who the leaders are, the visionaries, and it gives very detailed information about the trends, the weaknesses, the usability, and a host of other factors for you to consider about implementing a rolling forecasting tool in your accounting and finance team." When you’re evaluating technology, make sure you choose a solution that will meet your evolving business needs:

• Cloud-based for easy communication and collaboration
• Supports automated processes
• Connectivity and compatibility with the rest of your tech stack
• From a trusted vendor with a proven track record

Questions to Ask to Start Your Rolling Forecast Process

"A lot of teams are so reactive in terms of how they look at their business. So one way that finance leaders can begin moving towards a rolling forecasting model is really, really getting concrete on what your processes are," Chris says. This involves answering some fundamental questions:

• What are the business processes that inform your outlook?
• What are the key performance indicators (KPIs) that shape the future of your business?
• What do we say we're going to do, and how are we going to do it?

3 Pitfalls in Adopting Rolling Forecasts

So, where do people get stuck in adopting rolling forecasts? Chris shared three key areas and what Finance leaders should do to keep the process moving.

1)   Too Many KPIs

"People measure too many KPIs," says Chris. "How can you, as a business, have 15 different things that you're measuring in the future outlook and 15 different model assumptions that you have in your rolling forecast? That's way too much." Instead, Chris recommends that companies focus on the four to six KPIs that will have the most impact on the business going forward.

2)   Poor Understanding of Business Drivers

Chris says it's not enough to master traditional accounting and finance functions such as managing the general ledger, journal entries, and depreciation. "As accounting and finance teams, we know the numbers. But you have to understand the business. You’ve got to understand what drives revenue, what drives costs, what drives cash, what drives a customer margin, and what drives lead generation," Chris says.

3)   A Time Horizon That's Too Far Out

Another pitfall, according to Chris, is trying to forecast way too far into the future. "Typically, you want to have a rolling forecast model at most on a 12-month perspective," he says. As you get further away from the current day, forecast accuracy declines. And while you may be directionally accurate 18 or 24 months out, the numbers won't be precise. With rolling forecasts, the goal is precision. Chris says, "You should have ... 90 to 97% confidence that this is going to be what you're seeing in the business in the next three to six months." Keep the focus within that 12-month window, and you can increase your accuracy.

3 Ways to Level Up Your Current Rolling Forecast Efforts

Chris also offered three ways that Finance leaders can optimize their current efforts with rolling forecasts.

1)   Involve Stakeholders From Across the Organization

Rolling forecasts have the power to inform and shape the business, but if people aren't invested in the forecasting process, they may not trust the results. "Don't make your rolling forecast specifically a finance exercise," Chris says. "Like, don't make it just about accounting and finance going off and producing a 3-, 6-, 9-, 12-, 18- month rolling forecast." Chris suggests sales, marketing, and other operational areas should all feel like they have a stake in the process.

2)   Help Your Team Understand the Value of the Technology

FP&A technology can make the adoption of rolling forecasts much easier. But your Finance team may see new tech investments — and especially new, automated processes — as a threat to their jobs. Chris says it's essential to continually reinforce the value-add of a rolling forecast and how it can simplify people's jobs — and make the Finance team more valuable to the organization. "You really want your people in the high-value activities of a rolling forecast model," Chris says. For him, high-value activities revolve around what he calls the four Cs: Collaboration, connection, communication and clarity. Let your team know that automation doesn’t mean the end of their job; instead, it means they can focus on helping guide the business.

3)   Start Tracking Forecasting Error

"I think too many times people implement a rolling forecast and say, 'Hey, we did a great job of looking at the business for the next 12 months, without actually learning from the data as they move forward," Chris says. "A way to really level-up your processes around rolling forecasting, [is] implementing forecasting error, measuring it, tracking it, and making sure your team is laser-precise on the variances and errors in the business." To determine your forecasting error, compare your projections to your actual results on a monthly basis. Then you can see how accurate your model is, and make adjustments if necessary. Chris says high-performance teams should strive for a margin of error that's less than 3% each month and less than 5% for the quarter. If you achieve this level of precision, Chris says, "You can go to the business and say, 'I have comfort and confidence in the forecast that I'm producing. Because I know our margins, our forecast error is +/- 5%. We are precise in our KPIs. We're precise in how we're communicating the clarity to the business. We're precise in where we're going with the business.'"

Get Rolling for Better Precision and Agility

Our survey found that rolling forecasts are one of three essential capabilities of leading Finance departments. While it does take time and effort to make the switch, the benefits in accuracy and agility are well worth the trouble. View the full FSN survey results to uncover all the reasons why your business needs rolling forecasts. For more from Chris, follow him on LinkedIn and Twitter.