In mid-2021, a cutting-edge IoT SaaS company that had recently expanded into a new market was confronted with the economic impacts of the Covid-19 pandemic. As a result, the company's target market underwent significant changes, necessitating a pivot in its Go-to-Market strategy, which increased operational risks and uncertainties significantly.
Consequently, the startup CEO (a client of mine) realized that the original budget, which the board had approved at the beginning of the year, was insufficient to meet its new needs. We understood that the best approach for managing this dynamic and uncertain environment was to adopt a Rolling Forecast. Table I provides a detailed comparison between a budget and a Rolling Forecast.
Following the successful implementation of the Rolling Forecast, the startup CEO gained valuable insights which proved instrumental in fostering continued growth and success. He was able to navigate the most challenging and uncertain business environments with more confidence.
As a seasoned consultant in the startup industry, I strongly recommend considering the following key takeaways as "food for thought" to further optimize the benefits of the Rolling Forecast:
- Using the original budget as a Baseline: To ensure the original fundamental elements of the company's business and financial planning were reflected, we used the approved budget as a starting point for the Rolling Forecast exercise.
- Model Development: We chose a "Less is More" approach for the Rolling Forecast model, including only a minimum number of data inputs. This approach allowed us to focus on the main revenue and cost drivers, such as market penetration, pricing, headcount, hiring dates, and salaries. We evaluated the forecast model on a monthly basis for a rolling period of 18 months, allowing us to refine our projections while comparing the new Rolling Forecast to the old one.
- Avoiding Extrapolations: Instead of relying on actual numbers and extrapolations, we gave less weight to the former and used ongoing market feedback to make estimations. Our actual results were compared to the Rolling Forecast instead of the budget.
- Operations Efficiency: Rolling Forecast helped us to achieve operational efficiency, especially at year-end. It allowed us to question why a particular item was necessary instead of whether it was in the budget. This approach contributed to the "lean startup" methodology, emphasizing efficiency, and avoiding unnecessary expenses.
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Chart I illustrates the Rolling Forecast's impact on cash balance and runway. The purple line represents the cash balance, which decreased from $19.8M in Dec-2020 to $14.6M in Jul-2021 when we initiated the Rolling Forecast. The gray line depicts the original budget extrapolation, which projected a cash balance of $6.5M by Dec-2022. The green line shows the first 18-month Rolling Forecast, which forecasted a cash balance of $2.5M by Dec-2022. This snapshot led to immediate operational actions. In the next Rolling Forecast cycle, new operational policies increased the projected Dec-2022 cash balance.
In today's uncertain and risky business landscape, Rolling Forecast has become a crucial tool for startups. By adopting this flexible approach, organizations can quickly respond to market changes, tackle risks with agility, and capitalize on emerging prospects in a timely manner. Moreover, implementing and maintaining this dynamic tool will enable startups to lay a stronger foundation for creating high-quality budgets in the future.
