For us finance people, budgets are a necessary evil that can create a bit of tension in any organization. It’s too bad, because budgets are a valuable tool that exercises our understanding of how revenue and expenses interact in our organization.
Is there another way? Of course. While I have been using rolling forecasts for some time, I recently read an article from HFMA, Rolling Forecasts Foster Collaboration Between Finance, Operations by Frank Stevens that, in conjunction with us being in budgeting season, renewed a bit of interest in this format.
A rolling forecast takes the normal budget process and turns it on its head. Targets are set for annual amounts, generally off last year’s numbers. Monthly amounts are populated at the beginning of the year and then updated every month moving forward based on better data.
This has a profound effect on the budget process in that it shifts the attention from a static budget to one that is agile and educational. There is a mindset shift that enables the process to become very educational and collaborative (involving management and operations). When things are looked at and updated on a monthly basis, fluctuations in forecasted amounts to actuals are generally linked to a misunderstanding of the relationship between revenue, expenses and the ongoing business operations. The rolling forecast forces us to examine those assumptions and learn from them, giving us a much better understanding of the business and ultimately making us more effective at long term planning.