Introduction
Budgeting and forecasting are two important tools for management in performance planning and measurement. Both of these techniques work similarly, as they observe the historic data, apply changes, and forecast a plan of action for future activities for the management. Uncertainty in macroeconomics or volatility in microeconomics both call for a robust approach, which means short term planning needs to be more flexible than ever. Traditionally budgets are planned as a tool for achieving the strategic long term goals of an organization, a more robust approach to budgeting that changes targets and objectives more frequently is “rolling budget”.
Definition of Rolling Budget
“A budget continuously updated by adding a further accounting period (month or quarter) when the earliest accounting period has expired. Its use is particularly beneficial where future costs and/or activities cannot be forecast accurately” CIMA Official
Why do we say Rolling Budgeting is a robust approach to budgeting?
In contrast to the traditional approach, for instance; the incremental budget, the rolling budget updates on a monthly basis. Both forecasting and budgeting, aim to create value process. When forecasting is difficult due to a rapidly changing business environment or lack of data internally, the rolling budget technique provides a useful alternative approach for decision making. It is also called continuous budgets because the quarterly or monthly budgets are updated regularly.
Examples of Rolling Budget
A manufacturing company sets a total overhead allocation budget for a period of 12 months totaling $ 120,000. This budget will then be divided into quarterly ($ 40,000) and monthly budgets ($ 10,000). After the completion of the first month of production, the monthly budget is evaluated for overheads. The variance is taken into account and the budget for the next month, next quarter, and next year (from the second month to the next 12th month) is adjusted. The cycle of continuously monitoring, evaluating and forecasting is called rolling the budget.
Similarly, these techniques can be successfully implemented in:
- Financial budgets
- Sales budgets
- Production budgets for raw material etc
The rolling budgeting method has its own advantages and disadvantages.
Advantages
- It provides an accurate alternative to the forecasting (if unavailable)
- It focuses on continuous improvements as the budgets are monitored closely
- As the rolling budgets are prepared for short terms, planning and controlling the smaller targets is easier
- Rolling of budgets means adjustments to the variances in results is more robust and provides flexibility for decision making
- This method allows management to plan for the contingencies
- If short term budgeting targets are not achieved, the rolling budget method allows assessing the weaknesses causing the failures
Disadvantages
- Rolling budgets are divided into quarterly and monthly budgets which increases the work burden and costs
- Rolling budgeting and continuous variance adjustments require specific skills
- Often the short term goals and targets are not achieved, repeatedly analyzing these goals under rolling budget benchmarks may result in de-motivated management
- It may shift the management focus on more “planning and controls” than the actual activity performance
Conclusion
The rolling budget is an approach rather than a specific technique, it requires continuous improvements. It focuses on robust changes and adjustments. This may not be a suitable approach for the companies operating under stable conditions. This approach is more suitable to the companies where the external market conditions changes are swift e.g. in an IT or marketing industry. This approach also sets clear and specific objectives for the management. The goals are set for the short term and the evaluation process is easier. This approach reflects a more dynamic business management mindset. If implemented coherently the decision making with this approach will be more accurate and logical. However, this approach requires specific skills and is more expensive than other budgeting methods.
