How to Create the Budget You Need to Scale

In such a fast-changing world, the age-old practice of creating an annual static budget that governs a company’s financial plan for the entire year is broken and outdated. The solution? Implement a monthly rolling forecasting process.

“Set it and Forget it” Doesn’t Work Anymore

Back in the day, most businesses would create an annual 12-month budget, then “set it and forget it” until the time came to create another annual budget for the following year. In today's fast-paced and rapidly changing world, creating an annual static budget is a broken practice that simply does not work, especially for growing DTC brands. The global pandemic is just one example of how quick, unexpected changes can disrupt a company's annual budget. As a result, growing brands must adopt a more flexible approach to budgeting by implementing a monthly rolling forecasting process.

What is a Rolling Forecast? 

A rolling forecast is a budgeting technique that calls for companies to update their financial projections on a regular basis, typically every month. Unlike an annual budget, a rolling forecast provides businesses with ongoing visibility and helps them quickly adjust to unforeseen changes. For example, due to fast-changing market conditions, a DTC brand may experience monthly fluctuations in product, logistics, and advertising costs. With a monthly rolling forecast, the company can quickly adjust the assumptions in its financial projections each month to reflect the most current market conditions, allowing it to make quick, informed business decisions.

Advantages of Rolling Forecasts 

Are you convinced yet? If not, here are several key benefits of rolling forecasts:
  1. They empower brands to operate with more agility and respond quickly to change, which is critical in today's fast-changing business environment. 
  2. They provide visibility further out into the future than static budgets. For example, if your annual budget time horizon is January to December every year, you only have visibility through the end of December at any point in time. With a 12-month rolling forecast, you always have visibility 12 months out from the current month, not the end of the current year. 
  3. They allow brands to use the most up-to-date information and assumptions to plan for multiple scenarios, including best-case, worst-case, and most-likely scenarios. Having these scenarios at your fingertips, again, drives agility and faster response times to change. 
  4. They encourage collaboration between teams, as all departments are involved in the monthly updating of key forecast assumptions. This keeps cross-functional planning and execution in sync across the business. 
A Sample Rolling Forecast Process

Let's take a hypothetical DTC brand called ABC Clothing. ABC Clothing creates an annual budget at the beginning of the fiscal year, which serves as the baseline for its monthly rolling forecast. At the end of each month, ABC Clothing follows a process to roll its forecast forward by one month: 
  1. The forecast time horizon is rolled forward one month, meaning the updated budget now forecasts 12 months from the current month, thus always retaining 12 months of forward-looking visibility throughout the year. 
  2. The brand updates its forecast assumptions based on any new information that has come to light since the last forecast roll. In doing so, ABC Clothing's finance team works closely with other departments like marketing, sales, and operations to gather data and insights that inform the updated forecast assumptions. 
  3. The brand also prepares different forecast scenarios, reflecting potential changes in market conditions, unexpected events, or alternate strategic paths. 
  4. By the end of the process, ABC Clothing has a clear understanding of its potential paths forward and can make informed decisions about its strategy and tactical execution. 

Implementing a monthly rolling forecast process is essential for growing DTC brands operating in a fast-changing environment. Adopting a rolling forecast process can help brands stay agile and responsive to change, which is critical for successful growth. 

If the thought of designing and implementing a monthly rolling forecast process overwhelms you, and you don't have a CFO on your team, consider hiring a Fractional CFO to help. 

At Free to Grow CFO we provide founders of growing DTC brands the financial insights they need to make fast, effective business decisions with confidence. And -- we're experts at implementing rolling forecasts. In fact, it's one of the first things we do with all our clients. 

Whether you choose to enlist the help of a Fractional CFO or take a stab at it alone, implementing a monthly rolling forecast process is guaranteed to be a worthwhile step toward achieving your brand's growth goals.

Until next time, scale on! 

Photo by Campaign Creators on Unsplash