Supply chain disruptions have provided a stark lesson on the weaknesses of traditional budgeting and forecasting methods. Under the best of circumstances, it’s difficult for manufacturers to forecast their performance over the coming year. When market conditions (not to mention economic conditions) are prone to change suddenly and unexpectedly, a traditional static forecast can quickly become obsolete. That’s why many manufacturers are turning to a rolling forecast model.
Static vs. rolling
The problem with static forecasts is that management tends to view them as once-a-year events. After the annual budget is set, managers may not compare actual to forecasted performance until year end. Even if they do recognize midyear that changed conditions have caused the company to fall short of its goals, they may not have the wherewithal to revise the budget.
With a rolling forecast, rather than setting a one-year budget and forgetting about it, management revisits the budget periodically. The review periods can be quarterly or monthly, for example, and certain numbers can be adjusted to reflect changing circumstances.
Benefits of rolling forecasts include:
Improved accuracy. By comparing actual to forecasted performance more frequently, and updating the numbers in real time, your forecasts become much more reliable and valuable as a planning tool.
Increased agility. Updating your forecasts regularly allows you to spot trends early and make necessary adjustments for unexpected events or evolving market conditions before it’s too late.
Contingency planning. Some manufacturing processes rely heavily on a particular raw material or component part. Creating “what if” scenarios can allow you to see how a sudden price increase or part shortage might affect your performance. You can then put contingency plans in place to mitigate the impact.
Automate the process
You may be concerned that switching to rolling forecasts will make the budgeting process more costly and time consuming. But once rolling forecast processes are implemented, most manufacturers find that they’re less disruptive than a once-a-year budgeting process. Budgeting and forecasting software is available to automate the processes. Contact us to determine if a rolling forecast is right for your manufacturing business.