Rolling Budget or Continues Budget
Rolling budget is the budgeting method in which the company keeps adding new period to the full accounting period. Accountants keep adding a new accounting period to replace the past one. For example, we prepare a budget for 2020 which start from January to December 2020, after the end of January 2020, we need to update our budget which reflects the last change. The updated budget will cover from February 2020 to January 2021. It will continue to update every month, the oldest month will be placed by the most recent month.
Some companies use a rolling budget every three months (quarterly) instead of a monthly basis. It will reduce the time spend on preparing new budget.
Company A prepares an annual rolling budget for the upcoming year. The budget cover from January to December 202X. The budget can summary and separate by month as following:
So what happens when the actual result of January 202X comes out?
During January 202X, company A makes sales $ 210,000, expense 160,000 so the profit is only $ 50,000. The budget for the next 12 months will change by deducting the January 202X and add another which is January 202X + 1. The rolling budget will look like this:
|January 202X + 1||220,000||160,000||60,000|
After the end of February 202X, we need to roll to the next month which is March and keep do the same for year around.
What are the Advantages of Rolling Budget?
|Advantages of Rolling Budget|
|Up to date budget||The rolling budget always reflects the outcome of the expired period into the new budget. We do not wait until year-end to prepare a new budget which will be late. The new budget will update on a monthly or quarterly basis any significant change will put into the updated budget.|
|Reduce the risk of error from prediction||As we know that the traditional budget faces a high risk of error due to the estimation of the next twelve months. The longer it takes, the higher of uncertainty. Rolling budget will keep reflecting on new changes. We do not wait for twelve months to update it. Instead, we update it every month or three months.|
|Always have a full budget period||Whenever the top managements want to review, the budget for the next twelve months is ready for them. It will help them to set high-level business strategy.|
|Responsive||This budget takes into account all the major changes within the industry and incorporates them into the business plan. Every change will include whether it incur at the beginning of the year, mid-year or at the end of the year.|
|Force manager to review budget regularly||In the traditional way, managers highly likely to ignore the budget and wait until it is too late. With this budget, it requires to update regularly, so they will spend time to review.|
What are the Disadvantages of Rolling Budget?
|Disadvantages of Rolling Budget|
|High Cost||The cost of preparing will be much higher compared to traditional because we need to do it twelve times (four times for quarterly budget) more than the traditional budget. So the cost will higher as well.|
|Time-consuming||The more budget we do the more time we spend.|
|Less focus on core operation||Budget preparation will become a monthly task for all departments. They will need to spend huge resources to complete this task rather than focus on the core value of their operation. Sometime they may feel demotivated due to the same work with less value. It will turn out to be useless work for them, they will try to complete without paying attention. It will turn out to be a less accurate budget.|
|Administrative work||All departments will require to join many meetings every time the budget update. It will even more annoying when the industry does not change that much within a month. Everything will keep the same, and they just do to complete the work without applying critical judgment.|