Should I use a rolling forecast?

Reality diverges from your budget extremely quickly, especially if your sales backlog is only large enough to support operations for the next few months. If so, sales could change so fast that the budget will look like science fiction by the second quarter of the year, and not even bear a slight resemblance to actual results by the end of the year.

The solution is to adopt a rolling forecast that you revise as soon as the financial statements are released for the preceding month. At a minimum, you should drop the actual year-to-date numbers into the budget, add the revised sales forecast, and see what happens to profits. Better yet, adjust the larger expense line items to bring them closer to actual expense experience, which will give you a budget that may yield a reasonable forecast of what will happen - at least for the next couple of months.

If you have a complex budgeting model, the work needed to maintain a rolling forecast may seem like an impossibility. However, if you develop a simpler model that aggregates information into high-level numbers, a recasting of the budget should not be an excessively large chore.

The result? A budget that stays close to reality, and which you can update without too much effort on an ongoing basis. And by keeping the model simple, you can focus on the key drivers of success, rather than being bogged down too far in the details.

Related Topics

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What is a static budget?
What is continuous budgeting?