24 Month Rolling Forecasts

Date: 29 October 2012
Category: Financial Forecasting, 24 Month Rolling
Tags: 24 Month Rolling, Trailing 12 Month, TTM, RealTime CEOs, 24 Month Rolling Forecasts

Do your company’s reporting methods guide you into the future or force you to look backwards? 24 Month Rolling Forecasts provide a powerful management technique that helps you predict and influence the future.

For over a decade  I’ve had the privilege of working with businesses in the US, Australia, Canada, the UK and New Zealand, across a wide range of industries. Many of them have been very successful companies, led by shrewd CEOs.

However, when analyzing their financial statements and methods of budgeting, I am constantly surprised that so many companies continue to rely on Year-to-date measurement and annual budgeting.

While Year-To-Date (YTD) is the most common method of financial measurement, it is also the least effective. Likewise, even though annual budgeting is the most common format it is fundamentally flawed.

Today I’m going to introduce the concept of Trailing 12 Month Measurement (TTM) and 24 Month Rolling Forecasts.

Limitations of Year-to-date (YTD) measurement and traditional budgeting

YTD only measures performance over a full year once every year (at the end of the fiscal year).  For the other 11 months it is measuring an incomplete year thereby exposing the user to seasonal variation.

Traditional budgeting is also flawed for many reasons:

• Only done once per year
• Focuses only on the income statement,
• Often driven by the CFO who is not necessarily the best qualified person in the business to predict and influence the future.
• Each month hours are wasted comparing variances between actual and budget.  These variances may be simply that changes that have arisen during the year that weren’t visible when the budget was made. Even the best CEOs probably don’t have real psychic ability!

Consider this analogy:

Companies that budget their future for the next twelve months, without updating it each month, are like a car driver who stares at a spot 120 metres in front of them and continues to stare at the same spot until they reach it. Safe drivers know to keep their field of vision consistently forward.

Are you staring at a spot on the road and putting your business at risk?  Or do you believe that  business conditions are constantly changing and each month we learn new and valuable information about the road ahead?

Why is Trailing Twelve Month (TTM) and 24 Month Rolling more effective?

TTM is underpinned by the internal recognition that each month is the conclusion of a 12 month period.  No month end is any more important than any other.  By viewing the business this way, we remove the impact of seasonality.  This is important because seasonality can create a veil that disguises trend changes.

24 Month Rolling forecasts have numerous advantages over traditional budgeting, not least is the ability to accommodate a rapidly changing landscape.  If a business could confidently say their landscape only changed once a year, traditional budgeting would be fine, however, I have never met a business that could say that!

24 Month Rolling forecast provides you with trailing twelve months (TTM) figures plus projections for the next twelve months, in the one model. This gives you the best possible picture of your business performance, incorporating past, present and future.

Imagine if you could get inside a time machine to go forward in time 12 months… You could see where your company is at that point of time and look back to the “current date” with all the benefits of hindsight.  And if you weren’t happy with your hindsight view of the current date, you could jump back in the time machine and return to the current data and do something about it in RealTime.  24 Month Rolling Forecasts provide that time machine!

RealTime CEOs learn from the past so they can influence the future by acting now, in RealTime.

In the next 24 Month Rolling post, I will expand on how to overcome predictable yet meaningless resistance to 24 Month Rolling forecasts.

If you would like to find out more, you can always contact us.  We’d love to hear from you.