With many of our clients we have moved to a rolling forecast instead of the traditional budget model. Why? To be frank, we started with this method a few years ago because so many of our micro businesses just used the budget more as a forecast anyway. Many solo entrepreneurs and micro business owners make quick decisions and run their businesses a bit on the fly. The mention of a budget is a painful thought to some of them and one that they resist as unnecessary with all their heart. They did not use the budget in the traditional sense of controlling their spending each month but rather as a forecasting tool for looking at where they will be now that they already made a decision and spent the money.
While this method served our small clients, it has actually become critical with our larger small businesses. With the rapid changes in technology and the continual political and economic uncertainty, small businesses need to be able to adapt to changes in the business environment in a very short time. It is no longer a certainty that you will be able to turn to a bank or outside investment to shore up a temporary short-fall in cash, so having a better way to plan the future and having the agility to adapt is crucial to success.
The purpose of a Rolling Forecast is to be able to foresee risks and opportunities, adapt your strategy given those risks and opportunities, and assign resources in a continual planning mode. The model depends upon identifying the key drivers in your business. In other words, identify what might cause your plan to vary, how you will know it is deviating from your original plan, and what you need to measure to see the deviation. And the model also needs to incorporate a cash flow aspect in the rolling forecast, since cash flow will make or break your business. For some businesses, for example, the key drivers in your plan might be the dollar value of open sales orders as of a certain day of the month, the price of raw materials, the number of credit sales and the average accounts receivable days outstanding.
Once the drivers are identified, various forecast models can be built to predict expected, worse case, and best case scenarios. By using a rolling process, you are constantly looking at what your results were versus what you expected, and by using multiple predictive models you will have already planned ahead and assigned the resources to act quickly given your results.
Friday, December 21, 2012
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