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Even in stable environments, it can be extremely difficult to forecast the future for your business. And yet, running a business without a plan can be disastrous. At best, you may be leaving opportunities on the table. At worst, you may not see a catastrophe looming until it’s too late to change course.
Our advice is to do away with the traditional budgeting process around an annual planning cycle. The point of any exercise must be to add value in managing the business. Traditional budgeting often fails this test for several reasons:
Waterfall reporting and rolling forecasts make for a more foreseeable financial future
Innovative companies have replaced traditional budgets with continuous planning and rolling forecasts. We typically recommend using a 5-quarter rolling forecast. As each period comes to a close, the management team evaluates actual results and changing opportunities in the marketplace and reforecasts out the remaining periods. Action plans should be developed during this review process to correct negative trends or exploit positive developments.
Best practices for implementing rolling forecasts:
One of the pitfalls of rolling forecasts is the tendency of management to try to make up a shortfall by pushing unrealistic favorable results into future quarters. A good tool for managing this phenomenon is the waterfall analysis. This is a simple chart that compares actual results across time periods against your original plan as well as against rolling forecasts you made along the way. Waterfall charts provide value by:
Here’s how it works. Across the top is your original plan, let’s say, units sold. Each column is a time period, we’ll say months. The next row is month 1, January, where we will plot in our actual results, followed by 11 months of forecasted data. The rolling forecast data may or may not change from our original plan, depending on how management feels the marketplace is responding to its efforts. The following row is month 2, February, where we will plot our actual February results, followed by 10 months of forecasted data, and so on.
Would you like to learn more about rolling forecasting or waterfall analysis? Let us know in the comments below, or talk to one of our CFO advisory service professionals today!
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