Brian Kalish began working this year with a spirits company whose products were so popular it periodically underestimated demand and lost sales from a lack of inventory.

"They had no stranded inventory," Kalish, a financial planning and analysis (FP&A) consultant, told CFO Dive last week. "They sold everything they could make."

Kalish said the company was on the classic Dec. 31 calendar-year close. "They were forecasting to the wall," he said. "They went into the budgeting process in late September, early October, to put together the budget, plan and forecast, but they weren't really getting a lot out of it. It was just more variance as they went through the year."

Absent accurate forecasts, the company could never be sure it would have enough product available to meet demand, he said.

"They were basically looking over what had happened the last 12 months, [made] a best-guess growth estimate, and assumed that’s how they were going to do it," Kalish said. “And it wasn’t bad. But the problem was stock-out. All of a sudden, orders were coming in and they just couldn't fill them as efficiently.”

His prescription: Replace their static, 12-month forecast with a rolling 12-month forecast, updated quarterly.

Longer shelf life

A rolling forecast covers a designated period of time — four months, a year, 18 months, whatever makes sense for your organization and industry — and is updated at regular intervals. As you update your forecast with the latest monthly or quarterly data, the data from the earliest month or quarter of your time period falls away, giving you a continuously changing forecast of your company's financial condition.

"By going to a rolling forecast, it gave them a much better idea, not only because they could see their internal information but because we structured it so they could start bringing third-party information in there," Kalish said. "All of a sudden, you can start seeing ramp-up."

The transition has been easier than it might have been, he said, because the company was ready to make a big move. "To make any of this work, you have to have four pillars: culture, process, people and technology," he said. "They wanted to go from having pretty immature to world-class analytics, so that's a beautiful situation to walk into. It's not a question of convincing someone."

The company is 25 years old, sells globally, and its finance function used Excel and an enterprise resource planning (ERP) platform. After conducting an audit to identify the tools and processes the finance operation was using, Kalish changed the company's architecture on the data analytics side and brought in a cloud-based tool for forecast planning and budgeting.

"What you don't want to do is what we call a lift and shift, which would be taking the [Excel] process and doing it in [a cloud] environment, because then you're missing 95% of the advantage of bringing on the new technology," he said.

Go for small wins

Kalish said it's unnecessary for a company to transition its entire forecasting process to a rolling system at once, especially if you're a larger company with multiple lines of business. In such cases, it can make better sense to pick a discrete line of business and forecast just that part on a rolling basis.

"It's always a challenge if you try to do something enterprise-wide, so I always argue, make little bets and wins and let them build, so there's nothing stopping you from doing it in parallel," he said.

Once you have a pilot underway, you can compare the rolling forecast to the old, static forecast to see whether you're getting more accurate numbers. "You can go back and model it," Kalish said. "These were the numbers we had the previous 12 months, say three years ago. What would the model have been that we constructed going forward?"

The spirits company is small enough that it made sense for it to transition its forecast as a whole. "They had no problem going all in," he said.

You also don't have to include in the forecast all of the data you're watching; you only need to include metrics that are actually driving your business. "You don't need to include things that aren't going to impact the company, aren't going to cause a decision to be made," he said. "You don't have to forecast them as frequently as something that has a much greater impact."

People focus   

In addition to transitioning the process and tools, you have to transition the people and, in some cases, that can mean rethinking whether the people who are most adept at using Excel are best positioned to manage the forecast under the new system.

Kalish said he worked with a long-established insurance company that saw the transition as a way to cut its finance staff. The new system required fewer people because so much of the work was automated, but the company erred by keeping its most experienced Excel staff.

"They found out shortly after these weren't the right people because they didn't have the skill set," he said.

The company ended up letting the Excel specialists go and hiring back some of the people originally laid off. "Some had moved on, of course, and they basically had to go out and find new talent," he said.

At the spirits company, the CFO will hire a director to oversee forecasting under the new system. It will either be an existing finance manager or a new hire, depending on internal personnel matters, but having someone who can oversee the system is key, particularly during the transition. The first year tends to be labor intensive, because you're asking your finance team to update the forecast every quarter, when in the past, they only had to do so once a year. 

"If someone tells you it's not going to hurt, they're lying," he said. "It's painful. At first, people are going, 'You're asking us to do four times as much work if we do this on a quarterly basis.' But the point is, you have to look at the whole year, because what happens is, when you get to September, you've already done it. You're just going to push yourself out 12 months.

"The beauty is," he added, "you build it once and you get better and better at it, get better information in it. When you're looking at your forecast, your next 90 days should be more accurate than your second quarter, your third quarter, your fourth quarter. And that's always rolling forward. And if you have not just the proper processes but the proper culture, you get your forecasts in a more timely, efficient and, arguably, smarter way."