Putting together your annual budget and forecast are among the most time-consuming exercises your finance and accounting teams undertake, and yet these planning tools tend to become outdated quickly when they're put together using a traditional, snapshot-in-time approach.

That's why financial planning and analysis (FP&A) consultant Carl Seidman recommends you transition to a more dynamic process by producing a rolling forecast.

"These dynamic forecasts are not replacements for annual budgets — they are complements to them," Seidman said in a piece he wrote for the Association for Financial Professionals (AFP). "Static budgets are generally inflexible and reactive. They are time consuming to build and update and quickly become outdated after only a short time. They often aren't utilized effectively, thus causing employees to lose faith and not take the budgeting process seriously."

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 monthly. As you update your forecast with the latest monthly data, the data from the earliest month of your time period falls away, giving you a continuously changing forecast of your company's financial condition.

Seidman, an adjunct faculty member of the American Management Association and a longtime FP&A specialist, points to research showing that organizations are better at leveraging the financial and operational data they collect to predict trends when they use a rolling, instead of a static, forecast.

"With the advent of big data, more companies are able to utilize their information to perform analytics, identify drivers of performance, and make better business decisions in real time," he said.

8-step process

You take a risk any time you transition from a long-held practice, so Seidman recommends you give yourself sufficient time to implement the changes. "It should be done in a sequential order to avoid missteps and rework," he said.

Here are the transition steps he outlines:

• Objectives. Start with your goal in mind. "The individuals tasked with building and managing the rolling forecast should be clear about its objective," Seidman said. To identify your goal, try to answer questions such as, Who will be relying on the forecast? What business decisions will be made using the forecast?
• Time horizon. Determine how far into the future you want the forecast to go. "The further out into the future, the more insightful the forecast may be, but the less accurate," he said. In addition to the time horizon, you need to set what Seidman calls forecasted increments. "Will the forecast look into the future one week, one month, one quarter, or one year at a time?" he said. The longer the increments, the less detailed they will be, but the less frequently they will need to be updated, he said.
• Level of detail. Seidman calls for setting the level of detail based on the importance of the decisions being made using the forecast. "If the consequences of a bad decision are large, more time and effort must be spent to improve accuracy," he said.
• Contributors. Limit who takes part in the forecasting process to people who can contribute insightful, unbiased intelligence. "Participants should be empowered to contribute and held accountable to achieving or failing to achieve targeted performance," he said.
• Elements of value creation. Seidman recommends limiting the elements that get updated each increment to quantitative and qualitative indicators you've identified as value-drivers. "Assess what dimensions of the business are most important to its success rather than focus on every line item in the chart of accounts," he said.
• Vetting. Before you include a data source, be comfortable with its quality.
• Scenarios. Moving to a rolling forecast lets you test scenarios by asking what-if questions and then running the data, so Seidman suggests you make this part of your practice. "As new information becomes available or as assumptions change, the flexible rolling forecast can be easily updated and new scenarios can be run," he said.
• Tracking. As you would with a static forecast, you can assess variances between actual and expected performance, although with rolling forecasts, it's recommended you do this on an ongoing basis.

Ultimately, moving to a rolling forecast is about using the technology available today to better understand what's affecting your business. "It is no longer enough to install basic financial systems and employ someone to maintain them," Seidman said. "In a constantly changing world, companies must aspire to change with it."