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When deciding whether to use rolling forecasting alone or in addition to annual budgeting, finance leaders should consider major differences between the two approaches.

Hospital and health system finance professionals are turning increasingly to rolling forecasting to fortify their organizations’ financial projections with the most current performance information and data-driven assumptions. Rolling forecasting is used widely across many industries and by most Fortune 500 companies. In healthcare, it typically is applied in one of two ways: in conjunction with existing budget processes or as a replacement for annual budgets.

In a recent national survey, 28 percent of CFOs and other senior finance leaders indicated that rolling forecasting is used in their organizations to complement their annual budgets. Three percent have replaced their annual budgeting process with rolling forecasting.The optimal approach varies by organization and depends on numerous factors, such as organizational requirements, objectives, and resources. Following an overview of rolling forecasting, this article compares its use with—and independent of—annual budgeting, and common reasons for selecting each approach.

How Rolling Forecasting Works

Rolling forecasting allows financial reports to be reviewed and updated periodically throughout the year, often on a quarterly basis. “Rolling forecasts” that extend six to 12 quarters are calculated based on historical relationships and other approaches to estimate financial results given current operating conditions and assumptions. Those forecasts then can be compared with organizations’ long-term financial plans and other strategic targets to identify potential gaps between objectives and anticipated performance. Gaps then can be analyzed to identify operational or financial changes needed to more closely align forecasts and financial plans.

With rolling forecasting, high-level projections are made across service lines (e.g., radiology or cardiology) or entity (e.g., hospital or clinic) and by income-statement category (e.g., salaries, supplies) instead of by department and account, as is typical with budgets. Because these projections span multiple departments, they are not appropriate for individual managers to use for setting and tracking department-level spending targets, as they would with an annual budget.

Rolling Forecasting in Conjunction With Annual Budget Processes

In considering whether to use annual budgeting in addition to rolling forecasting, finance leaders should consider major differences between the two approaches. Organizations using both approaches achieve the value of the budgeting process, with its target setting at the department and account levels, and the benefits of rolling forecasting, which adds the most current information to future-period projections.

According to the survey, common reasons reported for using rolling forecasting alongside annual budgets include the following.

Requirements to retain annual budgets. Organizations’ boards of directors or debt covenants require annual budgets, and senior management requires monthly budget-to-actual variance reporting at departmental and account levels.

The benefits of more frequent performance projections. Organizations have targets for monthly, quarterly, and annual performance. A dual approach allows executives to compare current performance against short-term targets and to set long-term targets for the budgeting cycle, which can be monitored and adjusted as appropriate. In addition, rolling forecasting provides projections related to future capital spending and days cash on hand with a longer-term perspective.

Many healthcare organizations want the best of both worlds—budgeting allows the provision of department-level operating targets, while rolling forecasting allows senior leaders to monitor and respond to bigger-picture issues as needed. Long-range financial plans can be integrated into annual budget processes and then supplemented with periodic rolling forecasts.

Rolling Forecasting as a Replacement for Annual Budgets

The ability to use rolling forecasting to continuously track financial performance is a primary reason finance leaders at some organizations opt to eliminate annual budgets altogether. Rather than relying on budgets that remain static throughout the year, adjustments and updates can be made to address changing market conditions and to capitalize on new opportunities as they arise. Rolling forecasting typically takes two to three weeks per quarter (two to three months annually), compared to four to six months for average annual budgeting processes.

Common reasons cited by organizations for replacing their annual budgets with rolling forecasting include the following.

Budgeting deficiencies. Annual budgeting processes are more time-consuming than rolling forecasting. They use significant staff hours to create multiple iterations, and typically are inaccurate on completion. Assumptions may change significantly between the time budgets are developed and organizational needs arise.

Benefits of a longer perspective. Rolling forecasts can provide longer-range visibility, extending three years or more, while annual budgets set forecasts/targets for the next 12 months only. The longer perspective fosters the mindset of “spend only what you need so that we can build for the future” rather than “use it this year or lose it.” In addition, finance teams can be more efficient in their planning and nimble in their response times in an ever-changing healthcare environment.

Department-level managers at organizations that choose to transition to only rolling forecasting will need to focus on key performance indicators (KPIs) to explain variances and maintain corporate financial objectives. The focus of a rolling forecast is a cost-per-unit metric—for example, cost per adjusted admissions—rather than a dollar target per account as it is with a budget. Using a high-quality software tool, the goal of rolling forecasting is to drive continuous improvement by measuring period-over-period changes in KPIs, and to ensure that the trajectory aligns with long-term plans.

In summary, rolling forecasting can be an effective approach for financial modeling and is flexible enough to meet varied organizational structures. It can help to increase accountability and encourage efficiency and other process improvements. Regardless of whether rolling forecasting is being implemented in place of annual budgets, or in addition to them, healthcare leaders should have a firm understanding of the reasons behind their chosen approaches and be prepared to communicate that reasoning to encourage buy in organizationwide.

Jeff Goldstein is vice president and rolling forecasting product manager, Kaufman, Hall & Associates, LLC, Skokie, Ill.

Publication Date: Saturday, July 01, 2017