Amid this uncertain economy, there is a bit of good news for bankers. It turns out that annual budgeting and forecasting, a process that many bankers dread each year, may not be the best tool for you in this, or any, economy. To be truly agile, more accurate and up-to-date, more CFOs are turning to rolling forecasts.
How rolling forecasts work
A rolling forecast, according to U.S. Analytics, is a type of financial model that predicts the future performance of a business over a continuous period, based on historical data. It uses an "add/drop" approach that drops a month or period as it passes and adds a new month or period automatically. It allows you to plan continuously, as one month drops off when it ends, and another rolls onto the end of the model. Unlike a traditional forecast, it works with you and can change as time goes on.
Why rolling forecasts are the key to agility
The ability to react in real time is crucial. Here are six ways rolling forecasts can make you more agile, and able to "roll" with the changing economic tides.
- They improve accuracy. One top complaint about traditional yearly forecasts: By the time you've completed it, it's already obsolete. Even in the most stable of times, there are variables like interest rate movement, competition, branch resizing, the lending boom and other factors that can come and go. A rolling forecast improves the accuracy of your financial planning by keeping you aligned with changes in the business environment.
- They’re more up-to-date. CEOs expect CFOs to help drive profitable growth. To do so, you must be accessing and analyzing up-to-date performance information. Consistently high-performing banks are intentional about performance management. They follow a cycle that relies on frequent forecasting to drive strategy and future performance.
- They reduce risk. A more accurate forecast means less risk overall. Market changes can and do happen without much warning. That possibility of volatility in itself creates risk. A rolling forecast will help you adapt to those changes quickly, and allow you to reduce your exposure to risks.
- They identify untapped opportunity. If the business environment has changed in your favor since your last forecast, you can adjust your assumptions and see how your forecast would be affected if you made strategic changes. For example, you might find that deposits are up, allowing you to sufficiently fund more of your loans without buying funds. The earlier you seize profit-making opportunities, the better. In this way, the rolling forecast allows you to stretch a bit, try for opportunities and in the end, profit from them.
- They shorten the budgeting process. Many people believe that the annual budgeting process is so fraught with flaws (and universally disliked by FI professionals) that it should be replaced with rolling forecasts. While you may not be ready to do away with your annual budget, know this: Rolling forecasts could cut your budgeting time in half.
- They increase efficiencies. All of these benefits together mean a more accurate, efficient forecast, allowing you to be more agile and able to adjust the game based on unforeseen changes that may occur.
How Banker’s Dashboard can help
Financial reporting and performance management tools like Banker’s Dashboard can help optimize and streamline the rolling forecast process.
Banker's Dashboard empowers FIs to:
- Capitalize on daily performance metrics, quickly respond to changing market conditions and/or competitive pressure, and know when it’s time to revise your plan.
- Produce a more accurate budget in less time and without the use of spreadsheets. Create multiple budgets and rolling forecasts, test your assumptions, and model capital planning inside of a dedicated tool.
- Maximize NIM performance by identifying which accounts are helping or hurting your margin (branch, officer, product level).
- Quickly analyze the potential impact to earnings of raising or lowering CD rates.
- Drive branch performance by aligning behavior and setting goals around what you have committed to deliver to the Board
Banker's Dashboard helps you keep your finger on the pulse of what's happening in real time, allowing you to make data-driven decisions quickly and with confidence, driving your productivity and profitability in the process.
Unlike the mega banks, you have the ability to ramp up your agility by making quick decisions and acting fast in response to changing and oftentimes unpredictable conditions. The key to that is relying on the rolling forecast, rather than a yearly forecast that's set in stone before you know what those changing conditions are going to be.
Using rolling forecasts is a powerful way to make sure your bank is poised to thrive during trying economic times, but it's equally as powerful during stable times of growth and security. It's a tool to help smaller banks stay competitive with the bigger institutions, making it a win-win for FIs and customers alike.