24 MONTH ROLLING FORECASTING

Many companies with less than $100 million in revenue measure profit and loss using the year-to-date (YTD) method. With YTD, at the end of a month the finance team adds the previous month’s numbers to the P&L until they hit the year-end. After the last month of the year, the P&L provides a trailing 12 month view of each component of the P&L.

Many YTD businesses budget once a year and spend a lot of time and effort the following year trying to explain the variances between projections and actual results. While this traditional process is better than not budgeting at all, it has minimal value.

Some companies use what’s called a trailing 12 month look at their P&L. Instead of starting with an empty P&L at the beginning of a new fiscal year, and adding each month as it closes, the finance team keeps a rolling view of the last 12 months of the P&L, every month, regardless of the start and end dates of the fiscal year. When each month closes, the finance team adds it to the P&L register and drops off the oldest month.

Using a trailing 12 month (TTM) view of the P&L is powerful because it removes the impact of seasonality. TTM is often used by larger companies and is gaining traction with small to mid-market CEOs. While TTM delivers a more impactful view of the business than that of the YTD method, it still delivers only a historical view, without providing insight into the future.

Rolling Forecasting Provides a More Accurate View of the Future

A more effective way to measure profit and loss is to use a new method called 24 Month Rolling Forecasting (24MR). Twenty-four Month Rolling incorporates the power of the TTM and adds a real-time 12 month future P&L forecast, to provide a larger view of the trends of the business. This keeps the field of vision 12 months in advance at all times, instead of targeting a fixed date set by the government as the end of an arbitrary year.

24MR may seem unusual upon initial review, but the concept behind it is relatively simple. For a good analogy, think back to driver’s education class when the instructor told you to always keep your field of vision high, looking down the road, rather than focusing on the portion of the road directly in front of the car. The reason is obvious: Focusing directly ahead makes it difficult to react to changes on the road beyond your narrow field of vision.

Operational Culture is the Key to Strong Forecasting

The key to successfully implementing 24MR forecasting is to view it as an operational culture, conditioning the operations team to consider one simple question every month: What information has come to light in the last 30 days that changes our view of the future?

Based on the answer to this question, the operational team must decide how to change behavior and what actions they need to investigate in order to update the 12 month view of the company’s future performance. For example, if market changes make it clear that next month’s revenue and expenses will both be higher, then the operational team should make the adjustments during the 30 day review period. In addition, the team should drop the oldest month and add the upcoming month, using the performance of the prior month just closed along with any new information about the future, before adding the new month to the forecast.

Will this forecast be accurate 12 months out? Not necessarily. It’s simply a forecast. The good news is that each month, as the operational team closes a month, they will answer the question, What information has come to light in the last 30 days that changes our view of the future? Based on the answer, the team will make adjustments so that the forecasts become more and more accurate, until they become actual performance metrics.

Even so, the forecast will never be perfect – no one has perfect vision of the future!  So by combining our best estimate of the future (24 Month Rolling) with the Should We/Can We modeling tool we can get the best of both worlds.  Either tool is powerful, together they are even more powerful.  This symbiotic nature is common with many of the ShortTrack CEO modules.

At every 30 day update period, have the operations team keep the conversation at the operational level for as long as possible before dropping down to numerical implications. Here are some common questions to address:
What is our proposed pricing strategy going forward?
Will foreign exchange rates affect us?
What is happening to our input prices, e.g., steel, crude oil, people?
Are there new competitors in the market?
Have projects slipped back or moved forward?
Are we opening new markets?
Are we shifting product focus?
Is our product mix changing?

Some on the finance team might resist converting to 24MR. Here are some common resistance points:

• This requires a crystal ball to accurately predict the future month a year out.
• Isn’t this “moving the goalposts,” or constantly changing our targets? This is sending the wrong message to my team.
• I need Board approval on the budget, so I can’t do this each month.
• We have a lot of once-a-year transactions that will skew the monthly numbers.
• This seems like a lot more work. How do I fit it into my crowded agenda?
• People don’t like “budgeting.”
• Monthly data isn’t ready at month’s end.
• Processing items like depreciation each month is difficult.
• My accounting system won’t be able to handle this.

Some finance and accounting people are resistant to 24MR because it’s different from the methods they’ve used for decades. Resistance to change is common, but companies must change to continue improving performance.

24 Month Rolling Steps

To convert from traditional budgeting and forecasting to 24 Month Rolling, follow the steps below.

Use a 24 month rolling forecasting tool built into Excel

• The forecasting tool will display all your P&L line items in a 24 month view. The last 12 months will include your actual results; your future 12 months will include your forecast.

Update your actual results at the close of the month

• Upon the completion of a month, delete the oldest month and change the prior month from projections to actual results.

Update your forecast

• After updating your actual results, add a new month to the end of your forecast and have your team answer, with an operational slant, the key question of What information has come to light in the last 30 days that changes our view of the future? Use their answers to forecast the new month at the end of the forecast. Then, review the line items from the other 11 months and make any necessary adjustments based on the answers.

What’s next?

You’ve completed the 12 modules of the ShortTrack CEO system. Use the tools to update progress in key areas every 90 days to measure the tangible value you’re creating.

Learn about CEO's results on the ShortTrack