Hi Dean and Gary. These are interesting topics for discussion.
Research indicates financial forecasts based on operational activity should be linked to operational metrics. No evidence has been presented to show any technical problem with modern computer technology in using (a) driver-based financial forecasts as advocated by Gary Cokins in his reply March 17; and (b) incorporating some non-activity related forecasts. There has been talk about frequent changes in budgets and forecasts leading to an excessive workload and delays. Modern computer technology can convert the process into a data stream using dependent variables, as Gary Cokins puts it, and there should be no problem in incorporating frequent changes in using an adequate flexible computer system.
An important improvement required is to base a flexible system on two fiscal years rather than rolling forecasts. Businesspeople are used to dealing in annual data in strategic planning, budgeting, and annual financial reporting. A business needs to know what the balance sheet will be at the end of the current fiscal year and at the end of the next fiscal year. Can it demonstrate to shareholders, creditors and financial analysts that it has the resources to pay creditors on those dates? Monthly reporting can improve the monitoring of vital liquidity indicators between end of fiscal year dates.
Financial forecasts are likely to be more accurate, reliable and useful if they are based on fiscal years, as are budgets. Forecast cashflow should be after-tax cash flow. Taxes can be an important cash burden for a business. Income Taxes are based on fiscal year results. Modern computer systems can easily calculate indicative taxable income for each fiscal year and then calculate indicative cash payments. That is a process based on reality. Estimating a tax payment as x% of previous monthly income is not reality.
It follows that forecasting, both operational and financial, should be evolved beyond rolling forecasts to cover at least two fiscal years from the start of any current fiscal year. My paper on monthly reporting on organization performance supported forecasting - https://ssrn.com/abstract=4830384.
Geoff Williams
GLW Analysis Services Pty Ltd
Melbourne, Vic, Australia
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Geoff Williams Retired Member CA ANZ
GLW Analysis Services Pty Ltd
Melbourne VIC
Australia
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Original Message:
Sent: 03-18-2025 09:35 PM
From: Dean Sorensen
Subject: Effective rolling forecasts should reduce planning costs by up to 50%.
Gary, thanks for your thoughts. I have actually seen that video before. I agree with many of the things that you mentioned. However, the process that I am presenting in the webinar goes well beyond the one that you described in your video.
I believe that, if Finance professionals are going to become effective business partners, they need to stop developing tools and methods that have already been developed operational planning professionals. Especially when they are not nearly as good. For example, mature supply chain planning models are really advanced forms of driver-based planning, zero-based planning, capacity-sensitive driver-based budgeting, head count planning, activity-based planning / costing, direct cash flow forecasting.
Where these operational planning tools really shine is scenario planning – especially when it comes to cross functional tradeoff decisions. For example, one can simultaneously evaluate the impact of new products and customers on headcount, capacity, business process costs, inventories, direct supply costs, overhead costs, direct cash flows and product, customer and segment (ABC) profits. In so doing they enable manufacturers to translate demand (and other targets) into executable plans, in less than one day.
The point that I was making with this post is that traditional rolling forecast processes are creating little to no value in global manufacturers. Mature and fully integrated processes create vastly greater value, while taking far less time and effort to maintain.
Dean
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Dean Sorensen
Gig Harbor WA
United States
Original Message:
Sent: 03-17-2025 09:00 AM
From: Gary Cokins
Subject: Effective rolling forecasts should reduce planning costs by up to 50%.
Dean … Thank you for your post. I have a different opinion about the value of rolling financial forecasts. I believe there are benefits if they are properly calculated. What I next write is my explanation for this/
I am an advocate of initially using activity-based costing (ABC) as the source to calculate calibrated unit-level cost consumption rates for "capacity-sensitive driver-based budgeting". Those consumption rates are needed for zero-based budgeting (ZBB), rolling financial forecasts, and any what if scenario planning. It is the classic equation of forecasted product and service-line volume and mix times unit-level cost consumption rates equals the required capacity (e.g., number and types of needed employees with their salaries and wages) and purchasing spend with supplier. (It also involves classifying resource capacity with changes in demand as sunk, fixed, step-fixed, and variable with incremental / marginal expense analysis.)
I describe this topic, especially capacity-sensitive driver-based rolling financial forecasts in this 8-minute recorded video:
https://www.youtube.com/watch?v=tEcY5OiniX8
Comments? Questions?
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Gary Cokins
Analytics-Based Performance Management LLC
President
<maskemail>gcokins@...</maskemail>
Cary, North Carolina USA
Original Message:
Sent: 03-16-2025 08:10 PM
From: Dean Sorensen
Subject: Effective rolling forecasts should reduce planning costs by up to 50%.
When organizations establish rolling forecast processes, effective ones have one tactical benefit. They can reduce financial and operational planning costs by as much as 50%. However, many organizations experience the exact opposite. Rolling forecasts increase planning costs, while delivering minimal impact on enterprise costs, profits and value. A classic symptom being that rolling forecasts don't support direct cash flow, working capital and FX exposure forecasting.
What's your experience with rolling forecasts? What benefits do you get? Do these benefits translate into material improvements to profitability? Do they reduce planning costs? Do they support direct cash flow forecasting? Do they eliminate / materially change budgeting processes?
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Dean Sorensen
Gig Harbor WA
United States
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