Strongly Consider a Rolling Budget

Many companies do not prepare an annual budget, which is a mistake. The preparation and use of budgets has been proven to improve the success of any business, especially when it is used as a benchmark throughout the year. The budgeting process forces your organization to seriously look into the future and try to predict what impact outside market forces and internal business constraints will have on your company’s future. This is something that should not be done “just to get it over with” or to satisfy some outside requirement – it is important.

The preparation of budgets is not an easy task, as they take a lot of time and should include many employees. If you do not involve others, the budget will not have any “buy-in.” Budgets should be built from the bottom-up by getting those individuals who have specific responsibilities to prepare their forecasts for the coming year. Budgets developed and sent out from the top never work well.

One of the reasons people use to justify not budgeting is that during the year situations change and that the budget will no longer be valid. This is not a reasonable excuse, as many of the assumptions you made when developing the budgets will still be valid and the exceptions can be explained. One changing situation does not make the budget totally wrong.

If you often have changes in your budgetary assumptions that is a major indicator that you did not look far enough into the future, or that you did not have a realistic perception of your current reality. In developing budgets, you should talk with your significant customers and suppliers to get their input for the coming year. And if you are considering new product or service introductions, remember that they never proceed as fast as you project.

Another issue with static budgets is that the company often divides the annual budget by 12 to get the monthly levels – another mistake. Your budget should reflect any seasonality in your operations. If in the first few months conditions change and your performance is significantly off budget, some companies just revise the budget to push these changes into subsequent months. For example, if sales are off 25%, this amount is just added to the next month’s budget. These actions are never correct and indicates that they budgets really are not used for any true performance measurement.

In the current economy, assumptions may be changing rapidly. The organization may have limited control over these changes. Because of this, companies have developed the rolling forecast, which is redone during the year when there are significant changes in the assumptions or market conditions. This may sound like a waste of time, but it is important to get your team together when you recognize these changes and implement new plans to adjust. Do not just bury your head in the sand and claim that you can do nothing. Adjusting your tactics for change is critical. You are not just changing the numbers in the budget – you are adjusting your business tactics to meet current realities.

What are rolling budgets? Some of the more progressive companies have been using rolling budgets for quite a few years. These companies include American Express and Unilever, and many smaller companies have initiated rolling budgets in the past few years. When the budget for the year is developed, management will modify the budget on a monthly or quarterly basis to reflect major changes from the initial plan, and then forecast forward.

While the traditional budget normally is developed for the current fiscal or calendar year, rolling budgets should always be for at least one full year from the date of the modification. If you have to change budgets in June of this year, the new budget should be extended through June of next year. As examples, you may have to make modifications in sales forecasts, pricing on supplies or services may go up or down significantly, interest rates may change, or you may have to get additional funding for a new piece of equipment to stay abreast of the market. Change may indicate that you may need to conserve cash as much as possible, or that you will have additional cash to pursue other opportunities.

While some of the larger companies will make changes on a monthly basis if conditions warrant, you may only consider changes on a quarterly basis. Modifying budgets does take additional time, but the effort to step back and look at the impact of these new conditions will allow you to more adequately address the changes that are needed in your business plan. And your team will spend more focused time on adjusting your business tactics to achieve the best results.

Rolling budgets may require that there be some modifications in the software you use. It may be necessary to develop some additional reporting capabilities (hopefully within your current system) to better track performance. Developing specific benchmarks which can be reflected in your reporting is quite helpful.

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