The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, cohost of CFO Thought Leader.

CFOTL: So often, companies just don’t know where they stand today when it comes to forecasting. They’re asking themselves, “Are we falling behind? Have our competitors already figured out how to make forecasting a competitive advantage?” And yet I suspect that some companies would tell us that it’s not even a primary concern yet.

Carlson: Well, I think it has to be. I think that we talked a bit last week about the pace of business decision-making and how fast things are happening now. I think that if you’re not doing a rolling forecast or changing the way you think about your projections and using this to your advantage, you’re really missing an opportunity to capture key information and make better decisions. If you go back historically and look at how organizations have thought about forecasting or budgeting, you’ll find that it was an annual exercise or done maybe every 6 months. The reality is that those are very arbitrary time frames. There are recent studies concerning forecasts and budgeting, and they’ve revealed that organizations using annual budgets find that they’re obsolete within the first two quarters.
And what happens at this point if you’re comparing yourself against information that’s not relevant? I can think of one example when I was back in a formal organization of mine. We locked in our budget in mid-December. We kind of closed for a week at Christmas and came back on January 2. Meanwhile, there’d been a major shift on one of our significant deals and our budget was completely obsolete. We had to redo the whole thing. It was a painful 2-week period for me and my team and really the whole management team. We had to kind of go through, reassess where we could, see how we needed to adjust, but we had to do it just the same. I think that we probably set a record there with a within-days-obsolete budget, but I think that a lot of organizations have experienced this, and if you’re not adjusting, your entire profit for your variance analysis is rendered relatively meaningless.

CFOTL: So what are some of the primary reasons an organization may have to resist adopting a rolling forecast?

Carlson: I think that the number one reason companies resist this today is the time that they think it’s going to take and the time it would take if they just took their current process and started doing it every month and extending the projections out an additional month so that they were always doing 12 months of projections. When we survey companies and ask how long they spend doing their annual projections, the numbers are quite staggering. A large number of companies spend 3 to 6 months putting these projections together. You obviously can’t do this every month. But if you come up with a more efficient, driver-based process that focuses on the key elements that impact the financial results and create a more streamlined process, you’re able to do this rolling forecasting more efficiently
CFOTL: Is there a typical time frame, or can you give us a sense of what companies should expect?
Carlson: Well, from my perspective, everyone’s different. It’s really going to depend on how much detail is desired, but I think that if you’re doing a monthly reforecast and it’s taking more than a few days to gather this information and produce the results, it’s probably taking too long. So, less than a week is really the amount of effort that it should take and it should not be significant as to the hours. If you’re doing more than this, you’re too detailed. I can think of one, actually probably more than one — probably a half-dozen companies we’ve worked with — where they have so many supporting schedules that it would take an extended period. If it takes a person 5 minutes to complete a supporting schedule and you have a thousand departments and you have 30 supporting schedules, I mean, you can multiply out the math and it’s going to take you 6 months to update your model, and that’s not what you want to do. You want to be focused. We always say to use fewer than 20 key drivers unless you’re a really large organization.

CFOTL: We’ve had many CFOs tell us that once they put in place a rolling forecast, the mind-set of their organization actually changed and people began thinking differently …
Carlson: I think that this is absolutely true. If you’re just doing an annual process, you think about the budget as a very linear exercise. It’s compulsory. You have to do it. It’s something that you do every year, but you start it at a point in time and you finish it.
Organizations that have shifted begin to grasp a continuous cycle. It’s a shift from a linear focus to a cyclical one. We pull together the best allocation of our resources, and then we’re going to go execute, and then we’re going to review and reassess. It’s really a three-step process, and it continually happens. They move faster. They get less hung up on variance analysis, and it’s less punitive.
CFOTL: So when you want to execute a rolling forecast, do you pull a task force together or do you form a committee to help build consensus and educate people as to what you’re doing?

Carlson: I always feel that if you create a committee, it kind of sounds like it’s going to take a long time and it’s a lot of effort and it’s more hours out of people’s day. I do think that you need to build that consensus, and whatever the mechanism is to do this is important. I do think that you need organizational buy-in, so I think that Step 1 is for the CFO or director of FPNA to show the organization how this change is not going to overly tax them from a time perspective and that there’s something in it for them, right? So, for example, you make sure that you have a process and technology that will support doing this, that you’re not going to … if, historically, your budget process took 3 months … you’re not going to ask that same level of effort out of everyone every month. There’s a need to show that you have the technology and process to support this. Then, you would want to get buy-in, and I do think that it’s a good idea to bring in maybe a pilot group or, like you said, a committee of people to maybe participate in the process first and demonstrate that it’s not an overly onerous process.
And then also I always like to make sure that if you’re going to move to a process where you’re asking for more regular interaction from the business, make sure that there’s something in it for them. This might be they’re going to get self-service reports or they’re going to get regular reports in real time. You know, information that they used to have to ask your team for on a regular basis, they can now maybe get on the second day of the month themselves or something like that. Include a win for them.

CFOTL: Nice. Now, how do you know that you’re staying on course? Or, say, when you’re at midstream in the process here …?

Carlson: What’s key is that if you move toward this process of having a rolling forecast and updating it regularly, you want to also make sure that you are checking to see that your assumptions are valid and doing a regular financial review at least on a monthly basis comparing actual results vs. the last projection. And I think that this is a really big difference in what a lot of organizations do — where before, they did that review, but they were doing it vs. the budget, and I think that comparing it to the last forecast gives you an opportunity to continually fine-tune how you’re projecting and to see where you’re getting it right and wrong. You can stay on course and then make adjustments, and then the next month, when you’re doing this review, it remains meaningful. You’ve already known that you’re off course with the budget, so implementing this regular review and having this cycle can then be paired with really great reporting that your organization can access in real time and really have be as self-serviced as possible. So the finance team is not just generating reports and sending them out and being administrative, but it is analyzing them with the team.

CFOTL: We’d love to talk with you some more about monthly reviews. How do you put these in place? Do you have time for us next time to talk about this?

Carlson: Sure. I think that this would be a great topic for our next talk. It’s really a way for an organization to take forecasting to the next level.