In today’s dynamic business environment, financial planning is essential for the success of any organization. Two predominant approaches in this field are the traditional forecast and the Rolling Forecast. Understanding their differences, objectives, and applications is crucial to determining which one best suits the specific needs of a company.
Both the traditional forecast and the Rolling Forecast aim to anticipate a company’s financial performance, but they have different objectives. While a traditional forecast (or annual budget) focuses on establishing a fixed plan for a specific period—providing stability and control in relatively stable environments—the Rolling Forecast (or continuous forecast) maintains a dynamic financial view that is updated with recent data, allowing for greater flexibility and responsiveness to market changes.
Traditional forecast
The traditional forecast, or annual budget, is a static financial planning process that projects revenues, expenses, and other key indicators for a fixed period, usually one fiscal year. It is prepared at the beginning of the year and relies on historical data and assumptions set at that time. Once approved, this budget is rarely modified during the year, which can create discrepancies if market conditions change significantly.
Advantages
- Stability and control: Provides a clear structure for financial management and facilitates the tracking of specific objectives.
- Simplicity in preparation: As an annual process, it allows for detailed planning and established resource allocation.
Disadvantages
- Rigidity: Does not easily adapt to unforeseen market or operational changes.
- Obsolescence: Can become outdated if conditions shift, limiting the company’s responsiveness.
Rolling Forecast (continuous forecast)
The Rolling Forecast is a dynamic financial planning tool that is periodically updated (for instance, monthly or quarterly). Unlike the traditional forecast, this method continually extends its projection horizon by adding new periods as previous ones end. In this way, companies can adjust their forecasts based on recent data and respond more quickly to changes in the business environment.
Advantages
- Flexibility: Enables continuous adjustments based on current information, improving responsiveness.
- Greater accuracy: By incorporating recent data, projections reflect the company’s current reality.
- Informed decision-making: Facilitates strategic decisions by providing a near real-time financial view.
Disadvantages
- Heavier workload: Requires frequent updates, increasing the time and dedication of the financial team.
- Reliance on precise data: The effectiveness of a continuous forecast largely depends on the quality of the available information.
Key differences between a traditional forecast and a Rolling Forecast
| Characteristic | Traditional Forecast | Rolling Forecast |
|---|---|---|
| Time horizon | Fixed (annual) | Continuous (monthly/quarterly) |
| Adaptability | Low | High |
| Review frequency | Annual | Regular (monthly/quarterly) |
| Accuracy | Based on initial assumptions | Based on updated data |
Goals and applications
Traditional Forecast
- Goal: Establish a fixed financial plan for a set period (usually one year).
- Use: Recommended for companies with stable and predictable environments, where market changes are not drastic.
- Reason: Provides a clear framework for resource allocation and setting annual goals, facilitating budget control.
Rolling Forecast
- Goal: Maintain a dynamic, up-to-date financial view by adjusting projections based on recent data and emerging trends.
- Use: Ideal for markets or industries characterized by high volatility (technology, retail, energy, etc.).
- Reason: Encourages adaptability and proactive decision-making in changing scenarios.
Practical example of a Rolling Forecast
Imagine a multinational technology company that adopts a Rolling Forecast with a 12-month horizon, updated quarterly. At the end of the first quarter (March), the finance team reviews the results and adjusts projections for the following 12 months, that is, from April of the current year to March of the next. This process repeats quarterly, ensuring the company always has an updated financial projection covering the next 12 months. Thus, rapid changes can be implemented in response to demand fluctuations or cost variations.
Recommended tools for implementing a Rolling Forecast
- Advanced spreadsheets: Microsoft Excel or Google Sheets, enabling the creation of flexible, custom financial models.
- FP&A (Financial Planning & Analysis) software: Applications that manage budgets, forecasts, and data analysis in a centralized manner.
- ERP (Enterprise Resource Planning) systems: Integrate various business functions and provide real-time data for more accurate planning.
The ideal tool will depend on the size, complexity, and specific needs of each business.
Euroaccounts: Your partner in international expansion
Since 1996, Euroaccounts has specialized in transforming the challenges of internationalization into opportunities for growth. We offer comprehensive consulting to companies looking to expand into the Spanish market, providing complete advisory services to guide global businesses through every stage of their setup in Spain. As members of IGAL, a network of professionals present in over 45 countries, we deliver a global service that meets the highest international standards.
- Corporate tax advisory: Specialized guidance in local tax matters to ensure compliance and optimize tax burdens.
- Strategic consulting: Tailored planning and strategies for the Spanish market.
- Subsidiary management: Comprehensive solutions for creating and administering subsidiaries in Spain.
With over 25 years of experience and more than 500 companies advised, Euroaccounts is committed to excellence, integrity, and personalized service to boost your business success in the Spanish market.
Conclusion
Ultimately, the traditional forecast is useful for stable scenarios with minimal market fluctuations, while the Rolling Forecast is better suited for high-volatility environments that demand rapid responsiveness and continuous adjustments. Evaluating your sector’s characteristics, data availability, and internal resources will help determine the most suitable financial planning approach for your company.
