Rolling budgets as a supplement to annual budgets

2. Rolling budgets (forecasts) as a supplement to annual budgets

A rolling budget typically is a 12-18 months horizon outlook of the budget which is updated periodically as time passes (e.g., monthly, quarterly) and new information becomes available.

Periodic updates may be accomplished with help of managers (e.g., department heads) and new information that has become available since the previous update.

The image below shows how the process works.  Let’s say a company has decided to start utilizing a 12-month rolling budget (forecast) and update it quarterly.  The company has an annual budget which starts with the 1st quarter of Year 1.  This starting budget is likely prepared before the budget year (Year 1) begins. Closer to the 2nd quarter of Year 1, the company updates the budget with information for the 1st quarter of Year 2 (a year ahead).  Then closer to the 3rd quarter, the company again updates the rolling budget with information for the 2nd quarter of Year 2 and so forth.  Thus, the company has a budget which covers a rolling 12-month period.

Rolling budget chart

There are many advantages of rolling budgets which may stand on their own or be considered in combination with annual budgets:

  1. Increased participation of managers and thus, acceptance and ownership of budget targets. Such participation will also result in greater precision of target numbers as managers will be more diligent in preparing more accurate numbers.
  2. Better operational planning, resource allocation, and financial decisions because management will analyze forecasts every 1-3 months (depending on update frequency) instead of every 12 months.
  3. Rolling budgets may allow a company to react better to changing market conditions.
  4. Potential elimination of the annual budget process altogether because budgets for the next 12 months (or more) will already be available when the annual budget preparation time comes.

At the same time, rolling budgets aren’t an answer to all annual budget related questions or issues.  The following items need to be considered when implementing rolling budgets:

  1. Rolling budgets may not have much advantage for companies whose economic or operational conditions don't change significantly.  Updating such rolling budgets periodically will be a poor use of company resources.
  2. Rolling budgets may result in changes to budget targets.  Such changes may not be received well by employees and may distract them from achieving any particular budget target.
  3. Rolling budgets are time consuming.  They require periodic updates and thus, utilization of company resources to review and update them.  A way to reduce such time commitment is to update only high level numbers in a rolling budget instead of updating a full budget.
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