Rolling budget definition

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What is a Rolling Budget?

A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.

A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budget updating activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a rolling basis, the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.

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Advantages of a Rolling Budget

Here are several advantages associated with using a rolling budget for a business:

  • Improved responsiveness. Rolling budgets allow companies to adjust quickly to changes in the business environment, such as economic shifts, supply chain disruptions, or changes in customer demand.

  • Better long-term planning. By continually updating forecasts, rolling budgets help companies look further into the future rather than focusing solely on a fixed period.

  • Enhanced accuracy. Frequent updates improve the accuracy of financial planning by using the latest data, which helps in reducing the risk of significant budget variances.

  • Full-year budget availability. The firm can always provide a full-year budget model to any lender or creditor who wants to see this information.

Disadvantages of a Rolling Budget

The downside of a rolling budget is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised. This results in a certain amount of variance from actual operating conditions in the months before the most recent monthly addition.

Example of a Rolling Budget

ABC Company has adopted a 12-month planning horizon, and its initial budget is from January to December. After a month passes, the January period is complete, so it now adds a budget for the following January, so that it still has a 12-month planning horizon that extends from February of the current year to January of the next year.

Terms Similar to Rolling Budget

A rolling budget is also described as continuous budgeting.