Author: Andy Tauro, Performance Architects
Are you happy with your current forecasting process? Is it providing the means to guidance that can be implemented? Or do you find yourself increasingly abandoning plans that were finalized with great effort, only to start over again? Are your goals being met? Is your current process flexible enough that new market factors, that could impact your business are incorporated into the process, and does this process allow for sufficient look-ahead duration to allow for planning? If you are currently using an annual forecast that uses a forecasting window that shrinks as the fiscal year progresses, you may want to keep reading.
A fiscal-year-based forecasting process typically forecasts into a “wall,” which is the fiscal year boundary. As the fiscal year progresses, the forecasting window reduces in size, and any goals not met in periods past need to be shoe-horned into whatever duration is left. As the end of the fiscal year approaches, it usually brings with it a rush to “use it or lose it.” In other words, whatever resources you were given to accomplish your goals at the beginning of the year must be used and the goals be met by the end of the fiscal year…otherwise you may end up losing “it” (resources, your function, your job, etc.). Furthermore, while you have built your guidance for the year, your competitors (or some other business entity that in the past did not affect your business), have made a move in the middle of the year that makes your fiscal plan nearly irrelevant.
An example would be a natural disaster, or employee action, shutting down a manufacturing plant just before you were planning to ramp up manufacturing to meet the holiday demand for your most profitable product. You now only have the rest of the year to rewrite your plan to adapt to this. If it took you a whole year to put your plan into action the first time, what are the chances that you will be able to do this in six months? Will you be able to show you stockholders a plan that will be able to answer their concerns?
Using a fixed-size rolling window for forecasting can solve some of these problems. Such a model moves the forecasting boundaries forward during the calendar year rather than keeping them fixed, and as a result you always get a fixed number of periods to build your plan. For example, if your fiscal year begins in April and ends in March the following calendar year, rather than working with reduced number of periods as the year progresses, the forecast window moves forward. So if you are working on a plan that begins in July, instead of nine months, you still get twelve. This allows for the same amount of time to implement the plan with every iteration. Moreover, since the plan can cover steps across fiscal year boundaries, resources that could not be adequately utilized need not be lost. Instead the new plan can lay out how to use these resources to achieve the intended goal.
While such an approach can have some challenges, the process can be made less effort-intensive with scripted seeding and extrapolation methods for developing initial plans. This way, financial planners can focus on doing what they do best, tweaking plans based on human skill and experience, and not recreating plans from scratch, every time.
Intrigued, looking for more information, want to figure out where to get started? Drop us a note, and we will be happy to help you explore how moving to a rolling forecast could benefit your financial planning and analysis process.