Rolling Budgets: Definition, Purposes, Advantages, And Limitation

Definition

A rolling budget is also referred to as a continuous budget. It is a budget that changes continuously over the course of the year. As one period, or month ends, another period is subsequently added to the budget in order to carry it forward.

The reason behind rolling budgets mainly lies in the realms of constant, and concurrent updates of financial statements in order to ensure that the given timeline is maintained.

For example, if a company produces a budget for the timeline between June 2020 and May 2021. As the month of June passes, the timeline subsequently changes, and therefore, the new budget set would be between the timeline of July 2020 and June 2021.

In other words, rolling budgets are changed periodically after set intervals in order to inculcate the impact of changing budget dynamics.

The manner in which rolling budgets are set and structured is similar to that of traditional budgeting documents. This mainly constitutes revenues, expenses, as well as profits. Therefore, it provides the users of the budgets with much-needed flexibility, since it changes with the given period of time.

Purpose                                                                                           

The main purpose of a rolling budget is to ensure that the volatility and changes in the overall business dynamic are accounted for in the planning process of the company.

Given the highly volatile business environment in the modern-day and age, it is an increasing challenge on behalf of the companies to be able to accurately predict the budget across a timeline.

Therefore, rolling budgets are mainly created with the objective to bring flexibility to the overall planning process of the organization.

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This is particularly helpful in cases where organizations have relatively volatile operations, and the uncertainty and fluctuations are detrimental for the organization.

Alternatively, it can be seen that this is mainly used for purposes where it is relatively harder to extrapolate and predict the outcome over the course of the business.

Advantages of Rolling Budgets

In the case where rolling budgets are utilized, it can be seen that it gets relatively easier and more accurate in terms of the overall prediction of the required budget. Rolling budgets can act as a very vital resource when it comes to realistic forecasts.

Given the fact that rolling budgets play a very important role in the decision-making process, it can be seen that rolling budgets are particularly helping in controlling expenses for the company.

Since budgets and forecasts are updated on a regular basis, it helps businesses in avoiding overspending. This might also be taken as a preventive measure in terms of generating negative cash flow for the business.

Rolling budgets are also considered important because they help to account for unprecedented expenses and leakages from the financial system.

In the case of an unavoidable and unexpected loss, it can be seen that rolling budgets can be considered particularly helpful when it comes to covering up for losses in the coming few months.

In the case of static budgets, this is something that cannot be changed, and therefore, it tends to have a detrimental impact on the budgeting and planning process within the company.

Finally, it can also be seen that rolling budgets are particularly useful in order to keep up with the changes in the business dynamic.

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It allows for changes in the forthcoming months, and therefore, this allows the business to change their strategy in order to ensure that they are able to adapt to the given change.

Rolling budgets provide companies with 12-month forecasts, which can give sufficient time to the company to prepare for the coming course of action.

Limitation of Rolling Budgets

The greatest limitation of rolling budgets is simply the fact that they might not be suitable for all businesses. For example, businesses that operate on the basis of jobs, and their revenue is structured in terms of longevity. This might not make rolling budgets implementable.

In the same manner, it can also be seen that rolling budgets are also harder to create, manage, and implement. This is because of the reason that rolling budgets are time-consuming, and hence, might require a significant chunk of time in terms of managing.

The organization might get distracted in constantly working towards the reallocation of resources and funds.

Another limitation is also the fact that rolling budgets are often pressurizing in terms of departmental work in the organization.

This means that rolling budgets often result in companies working towards budget fulfillment, as opposed to the actual goal of the business.

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