Rolling Forecasts: Rapidly Adjust to Market Realities – February 2014

The following addresses important concepts in Budgeting.  Traditional Budgeting arose as a means for companies to limit costs.  In today’s volatile business climate, many argue that it is a less useful tool.  Accordingly, some companies are moving towards a planning model that incorporates a rolling forecast rather than a static annual budget that is updated yearly in a typically arduous process.  The rolling forecast enables management to adjust financial tactics and strategy as business conditions reflect the realities of the market place.  Rolling forecasts  involve updating the budget monthly or quarterly, based on actual results.

Traditional budgeting, while serving an important function, has shown weaknesses as a management tool.  It has been rendered less useful due to the faster pace of business today as well as powerful technology that enables substantial automation of the budgeting process.  Although the average large company spends four months on the budgeting process, it often produces a tool that can be out of date upon finalization while consuming significant manpower.

An important use for traditional budgets has been to identify benchmarks to determine incentive compensation.  One result of this process can be less innovation because key leaders are motivated to stay within budget.  Alternatively, profits and other financial metrics, rather than budgeted expenses, can be used to determine incentive pay.  This enables a new focus for the budget to be better utilized as a powerful management tool.  The budget that utilizes rolling forecasts can help the firm adapt to changing business conditions

Rolling forecasts force businesses to more closely track spending, which means there is a continuous feedback loop that provides for more continues monitoring than the traditional budgeting model.  Simultaneously, trimming extraneous detail from the budget saves time in creating the budget; provides visibility to allow for adjustment; encourages collaboration; and lets technology do the “grunt work” – all of which lets people focus on driving value.

If you are interested in additional insight regarding this approach to Budgeting, please use the link below:

http://www.journalofaccountancy.com/Issues/2013/Oct/20137811.htm

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