Rolling Budget: Advantages, Disadvantages and Viability

Many modern firms find that competing in a complicated and ever-changing global environment makes a fixed annual budget a little too restrictive. Rolling budgets are being used by these companies, which provide more flexibility but also present a new set of issues in the financial planning process. 

 

Small company budgeting allows you to plan your money, anticipate obstacles, and estimate profits. There is no one-size-fits-all approach to budgeting. Instead of a typical budget, you could choose to employ a rolling budget.

 

Rather than estimating revenue and costs a year in advance, the goal is to critically examine them every now and then. And that is precisely what rolling budgets accomplish. A rolling budget ensures that you always have a current budget.

 

(Also Read -  Types of Budgets for Businesses)

 

What is a Rolling Budget?

 

Budgets are often prepared on a monthly, quarterly, or annual basis by most businesses. These plans are intended to create financial and performance targets for the present time as well as future standards. 

 

Rolling budgets, in contrast to standard static budgets, are ongoing budgets. These budgets are updated monthly (or, more rarely, quarterly) rather than annually, and they grow incrementally over time.

 

A rolling budget, also known as a continuous budget or rolling forecast, is one that evolves over time. Add another month to the end of the budget when one month expires. Your budget, for example, covers the months of January through December 2020. You can add January 2021 after January 2020 has ended.

 

Traditional budgeting documents are organized similarly to rolling budgets. A rolling budget summarizes your company's revenue, expenses (both fixed and variable), and profits. Using your existing figures, you will adjust your revenue and spending projections.

 

Rolling Budget is affected by the following factors:

 

1. It usually necessitates management's attention because such a budget is not static; rather, it is dynamic. As a result, it requires regular parameter updates.

 

2. The learner's approach is commonly used in the rolling budget since it necessitates the cooperation of a small number of authorized personnel who help build and maintain such budgets.

 

3. It is prepared on a constant basis and, in general, takes longer to prepare than static budgets.

 

4. Due to the dynamic nature of such models, it is also necessary to revise them on a frequent basis.

 

(Also Read - Capital Budgeting)
 

 

Advantages of Rolling Budgets

 

Rolling budgets have a number of advantages over typical budgets, including:

 

1. Reduced uncertainty and enhanced tactical usefulness for managing cash flow, correcting disruptions, or leveraging new insights to take advantage of possibilities for growth, investment, or increased profitability.

 

2. Your financial statements provide a more accurate picture of the financial health of your company. You can use the information from a rolling budget to develop a more realistic budget.

 

3. The rolling budget may be quickly amended if anything unexpected happens.

 

4. It can be used to evaluate actual performance in relation to the current budget.

 

5. Staying current with a budget allows organizations to respond more quickly to prospective changes, take advantage of possibilities that were not available when the budget was formed, and prevent difficulties that have occurred since then. The corporation can integrate a major shift in revenue or expenses into the rolling budget if it occurs.

 

6. It identifies the organization's potential shortcomings as well as its current strengths. It aids in the planning process by removing any significant weaknesses and focusing on building strength.

 

Disadvantages of a Rolling Budget

 

While rolling budgets offer a lot of flexibility and allow for quick modifications to suit changing market conditions or avoid company disruptions, they do have a few drawbacks, including:

 

1. Creating rolling budgets takes some time. Rather than projecting your business's revenue and expenses once a year, you should budget each month. Some firms, especially during peak seasons, may not have the time to do so.

 

2. In addition to higher staffing costs, shifting budgets may necessitate the acquisition of new software tools in order to be as efficient as possible. 

 

Organizations that still rely on Excel spreadsheets or manual, paper-based operations may be overwhelmed by the additional effort and time demands that rolling budgets impose.

 

3. If there is strong management and skilled people in place, the rolling budget usually works well.

 

4. Constant and abrupt changes can cause disagreements and confusion, as well as cause employees to lose concentration on their tasks.

 

5. It should not be used in businesses when conditions do not change frequently and transformation policies are not in existence.

 

(Also Read - Financial Analysis)

 

 

Traditional Budget vs. Rolling Budget

 

1. The company prepares a traditional budget once a year. A rolling budget, on the other hand, is created once a year but updated monthly or quarterly. 

 

Traditional budgeting for the following year begins in the fourth quarter of the year, whereas rolling budgeting is a continuous process.

 

2. Another significant distinction is that traditional budgets cannot be amended once they have been approved. However, if the underlying assumptions are changed, the rolling budget can be improved. The prognosis is made based on careful and thorough planning.

 

(Also Read - Revenue Deficit)

 

Viability of Rolling Budgets

 

A rolling budget is most commonly utilized when long-term future costs and/or business activities cannot be accurately foreseen due to the fast-changing environment. 

 

That is why, on a regular basis, a rolling budget adjusts or replaces a component of the budget cycle, thinking that the costs will be easier to forecast for this shorter time.

 

A rolling budget is also appropriate for any sector of business that necessitates ongoing monitoring. A cash budget, for example, is often a rolling budget due to the need to retain tight control over this area of financial management. A rolling budget approach is frequently used to create sales, production, overhead, and other financial budgets.

 

Are You Prepared for Rolling Budgets in Your Company?

 

Your company requires a dependable budgeting method, whether you're planning for the coming year or the coming term. The decision between a traditional budget and a continuous budget is mostly determined by your company's business procedures and structure, as well as the market's stability. 

 

However, if you're willing to commit the necessary resources, gain employee buy-in, and act quickly to capitalize on the insights gained from implementing a rolling budget, you'll be able to benefit from increased competitive agility and better decision-making to help boost your company's performance and profitability.

 

(Also Read - Venture Capital)

 

Bottom Line

 

The term "rolling budget" refers to the expansion of an existing budget. The existing budget could be updated on a monthly, annual, or quarterly basis. Budget rollover is another term for a rolling budget. Employees have a clear knowledge of the business goal and what they need to accomplish to attain it thanks to a rolling budget. 

 

For a successful budget, the information used to prepare it must be accurate; else, the business and its employees will suffer. In a nutshell, it can be compared to a continuous budget, which is a sort of budget that brings in fresh waves while remaining consistent with the previous budget.