Coming up with a budget is an essential step to running your own business.
Business budgets project revenue, expenses, and profits for an upcoming period — usually one year. Revenue projections are a way of defining your business’s income goals, while cost projections help you plan for expenses.
Ultimately, your budget serves as a financial road map that helps you focus on your goals and make strategic decisions.
Creating one budget for the whole year is enough for some businesses to stay on track.
But if your business is subject to frequent changes, a traditional budget may not give you the flexibility and agility you need.
Instead, you may want to opt for a rolling budget that you update more frequently based on new information and your business’s performance.
What is a rolling budget?
Rolling budgets (also known as rolling forecasts or continuous budgets) are dynamic budget models that add on the next time period after the current one elapses. In other words, as you complete one budgeting period, you add the next one in a continuous process.
In most cases, you update a rolling budget either monthly or quarterly.
Rolling budget vs. static budget
The traditional model is a static budget, which involves creating a fixed annual budget. The updating and planning process only happens once a year, typically in the fourth quarter.
In contrast, you continually update rolling budgets throughout the year to reflect the business’s actual performance. Since they’re not set in stone, rolling budgets can give a company more flexibility by providing regular opportunities to adjust based on real performance.
Rolling budget examples
Say you create a continuous budget that you update on a monthly basis. You start with January 2023 and go through the year to December.
Once January 2023 passes, you add January 2024 to the end as a new budget period. Now, your budget still covers a whole year, but it goes from February 2023 through January 2024.
When you update your budget, you do the following:
- Remove the period that just passed (in this example, January 2023)
- Add the next period at the end of the budget (in this example, January 2024)
When you add the next period to the end of the budget, you can use real performance data to inform your projections. For instance, if your January 2023 expenses were higher than you predicted, you can adjust the new budget based on that information instead of waiting until the next year to create another static budget.
Another common period used for rolling budgets is the quarter. You start the year with a budget that goes from Q1 2023 through Q4 2023. After Q1 2023 ends, you remove it from the budget and add Q1 2024 to the end. Now, your budget goes from Q2 2023 to Q1 2024, and so on.
Types of rolling budgets
You can apply rolling budgets to different areas of your business, including your:
- Sales budget, which uses sales volumes and pricing to predict revenue for a particular period.
- Production budget, which uses sales forecasts to estimate production volumes and helps with inventory planning.
- Overhead budget, which predicts all expenses outside of raw materials and labor.
- Capital budget, which forecasts the future cash flow of significant investments and projects, such as the purchase of new machinery or office space.
- Master budget, which usually spans one year and summarizes the information in other budgets to arrive at profitability forecasts.
Rolling budget advantages and disadvantages
Advantages of a rolling budget
The benefits of a rolling budget revolve primarily around its flexibility and use of real-time data to inform budgeting decisions.
Gerrid Smith, director of ecommerce at CBD wellness product retailer Joy Organics, explains that rolling budgets let businesses “adapt more quickly to new circumstances [and] take advantage of possibilities that did not exist when the budget was first drafted.”
Here’s a closer look at the pros of a continuous budget:
- Quicker response time. You can respond to unexpected changes in market conditions promptly because you update the budget more frequently.
- Adaptable performance management. Rolling budgets let you adapt your financial planning to real performance rather than financial modeling predictions. If revenues for one period are higher than anticipated, you don’t have to wait until the next year to adjust your budget accordingly.
- Improved decision-making. You can use short-term forecasts (which have less variability than long-term forecasts) to inform your decision-making.
- More accurate financial insights. Rolling budgets more accurately reflect your business’s financial state since they’re based on your actual performance.
- Increased financial accountability. When you use a rolling budget, you have to review your financial performance more often. Doing so can increase your familiarity with financial key performance indicators (KPIs) and make reporting to stakeholders easier.
Disadvantages of a rolling budget
Rolling budgets can let your business respond in a more agile manner. But there are a few drawbacks to using them:
- Time-consuming. Rolling budgets require continuous updates, which take up more of your team members’ time.
- Resource-heavy. Many businesses use input from several departments when creating budgets. If that’s the case, various team members will need to dedicate some of their time and energy to frequent budget updates.
- Lack of popularity. If you’re moving from a static budget to a rolling one, you may experience pushback or negative responses from employees that work on budget updates.
- Can be more expensive. The added complexity of rolling budgets makes it more challenging to manage them with tools like Excel or Google Sheets. You may need to invest in budgeting and forecasting software to streamline the process and reduce the extra workload.
When to use a rolling budget
Rolling budgets work best for businesses in dynamic markets that deal with frequent changes, including changes in consumer preferences and regulations.
Companies in more volatile or high-growth industries like CBD manufacturing, hospitality, and travel may benefit from more frequent budget updates.
Melissa Terry, CFA at plastic manufacturing company VEM Tooling, said, “I choose a rolling budget because it’s flexible, responsive to changes, enables better forecasting, and tracks progress in real time, allowing for adjustments.”
Rolling budgets can be especially helpful for startups and young companies that don’t have steady, predictable revenue streams yet. This allows them to better account for investment funds and unexpected income growth.
That said, businesses in more mature and stable industries may not need to update their budgets as often. In fact, the type of budget that needs updating on a regular basis may do more harm than good.
As Adam Garcia, owner of financial publication The Stock Dork, explains, “preparing rolling budgets in static environments could be a waste of time and money.”
Methods you can use with a rolling budget
If you’ve decided that the rolling budget is right for you, the next step is to figure out which method best suits your business.
Here are four budgeting methods you can use.
Incremental budgeting
When preparing an incremental budget, the goal is to make minimal changes each time you update it. In other words, you use the current year’s budget as a baseline. Then you make smaller changes to existing departmental budgets based on new information and assumptions.
Of all the options, this is the most traditional and conservative. It’s simple to work with, leading to more consistent funding and operational stability. However, it’s not the most conducive to innovation or large changes.
Activity-based budgeting
Businesses often use activity-based budgeting to reduce costs. In this technique, you start identifying cost drivers (such as raw materials, machine hours, and labor) and estimating your cost per unit. Then you multiply your cost per unit by sales forecasts to get your projected budget.
Activity-based budgeting focuses on driving value, so it aims to eliminate or minimize any costs not associated with revenue generation.
In addition to reducing costs, this method can be useful for new businesses without a long budget history or those going through major changes, such as an acquisition. The method can help you identify your greatest value-add activities and figure out where to focus your company’s resources.
That said, it can be more time-consuming because it requires tracking, researching, and analyzing every cost driver. Compared to incremental budgeting, which just looks at the previous year’s departmental budgets, activity-based budgeting is a longer and more resource-heavy process.
Zero-based budgeting
In zero-based budgeting (ZBB), the idea is to start each new budget from scratch, known as the “zero base.” During the planning process, you analyze each business unit’s needs and optimize your budget based on your business needs for the next accounting period.
Unlike activity-based budgeting, which focuses on costs associated with driving revenue, the zero-based method looks at the expenses and needs for each business unit. In zero-based budgeting, each department needs to justify their costs. If they can’t justify a cost, it should be eliminated from the budget.
This more flexible budget method lends itself to more focused operations and strategic execution. But, like the activity-based method, it does require more work to calculate.
Value proposition budgeting
Value proposition budgeting aims to allocate money more effectively by justifying business costs. As you go through your budget, you ask yourself questions like, “Why is this amount in the budget?” and “Does the benefit of this item outweigh the cost?”
A value proposition budget helps you eliminate unnecessary spending and invest more in high-value activities. One thing to keep in mind is that the value of some investments can be harder to quantify, so this can be more subjective.
What did you think of this article?
