What is a Perpetual Budget?

A perpetual budget is a budget that is continually extended whenever the current reporting period has been completed. This usually means that there is a budget in existence for all of the next 12 months, though the budget could be for a shorter or longer interval. The intent of using a perpetual budget is to always have a fixed planning horizon for a business, over which the management team is constantly making plans to implement changes to the organization.

Example of a Perpetual Budget

For example, a company operates under a standard calendar year, and so has a budget that spans the period from January 1 to December 31 of the current year. When the company completes operations for the month of January in the current year, it creates a budget for January of the following year. By doing so, the company maintains a 12-month budget that now spans the period from February 1 of the current year to January 31 of the following year.

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Advantages of a Perpetual Budget

There are several advantages associated with using the perpetual budgeting concept. They are as follows:

Good alignment with revenue forecast. A perpetual budget tends to be more successful when used over a short time period, such as just the next few months. By doing so, the budget can be more closely aligned with the short-term revenue forecast, resulting in a more realistic budget.
Enhanced attention to the budgeting process. By continually updating the budget, management is forced to continually reconsider whether it can achieve its goals. This can result in an ongoing recalibration of the budget to meet the realities of the current competitive environment.

Problems with a Perpetual Budget

Though the concept of a perpetual budget seems reasonable, it is subject to several problems, which include the following:

Estimation capability. Estimates of performance are being made for a period many months in the future, which can yield problematic results when a business cannot predict its results within a much shorter time frame. The typical result is that the budget for the newly-added period is an inaccurate baseline to use, once that period becomes the current period.
Estimation labor. The business must engage in detailed budgeting work in every accounting period, rather than the more usual planning process that is only completed once a year.
Revision limitation. Just because a new month is added to the budget does not mean that the existing budgets for any months in between are also revised. Doing so requires additional work, for which there may not be sufficient staff time available.