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The 2005 Re-forecasting study confirms once again what most managers have known for a long time. The annual budget takes too long, costs too much and in many instances adds little value. Traditional budgeting evolved at a time of stable trading environments where suppliers could dictate to the market. But today markets are increasingly unstable and the pace of change is rapid. Our management and control processes need to keep in step with this new business environment. This has led many organisations to adapt their budgeting process and look to other performance management methodologies, such as re-forecasting models that enable managers to respond more rapidly to emerging threats and opportunities.
But how this re-forecasting is managed matters greatly. There are basically two approaches. The first is geared to the fiscal year-end and is aimed at helping managers to "keep on track". Most efforts at re-forecasting fall into this category. They are often known as "3 + 9", "6 + 6" and "9 + 3", the second number representing the months remaining until the fiscal year-end. In some organizations this approach amounts to four budget recompilations per year and thus adds a huge extra burden. These forecasts are invariably confined to asking the question "Are we on track to meeting our targets and, if not, what action do we need to take?" And the resulting action often ruptures carefully crafted strategies designed to create longer-term value.
However, most managers know that their operations don't switch off on 31 December each year and start again on 1 January. They deal with these problems by moving to monthly or (more commonly) quarterly rolling forecasts. This is how they work. Let's assume we are just approaching the end of quarter one. The management team gets the rough figures for that quarter and starts to review the next four quarters ahead. Three of those quarters are already in the previous forecast, so they just need updating. A further quarter, however, needs to be added (Q1 for the next year). More time will be spent on the earlier quarters than the later ones using as much relevant knowledge and business intelligence as can be gathered. By definition, the fiscal year-end is always on the 12- or 18-month rolling forecast radar...