Advantages and Disadvantages of a Rolling Budget
Rolling budgets repeatedly extend the original budget period. For example, if you prepare a rolling budget for 12 months and the budget runs from Jan. 1 to Dec. 31, at the end of January, your budget period will change to Feb. 1 to next year’s Jan. 31. This means that a rolling budget is not static and continues perpetually.
The rolling budget incorporates information from experience to build or renew the budget for the next period. Rolling budgets can have advantages and disadvantages for the business owner.
The rolling budget incorporates changes from the previous period into the next, overlapping period, increasing continuity and oversight. Rolling budgets, therefore, are more up-to-date than a static budget, which does not consider the changes taking place during a forecast period. Unlike static budgets, rolling budgets do not require an extensive investment of time and money for planning. You just need to incorporate the changes from the past period.
In fact, the exercise may save you some costs and time, compared with static budgets, because timely adjustments of your expenses and income may help you realize favorable results.
Rolling budgets help you to be more responsive to unexpected changes in your circumstances and allow you to make adjustments for those changes in coming periods. You will not have to wait until the entire budget period ends to take account of changes. With rolling budgets, you assess your performance against realistic and rationalized targets. Rather than assessing performance based on outdated information, you assess performance based on targets that you have adjusted according to your changed circumstances.
A disadvantage of a rolling budget is that it is similar to preparing a new budget again and again. Such a budget requires you to regularly gather the facts from the previous period. Furthermore, rolling budgets require robust information systems and skilled personnel to extract accurate information for the various subcategories.
This constant revision of the budget may be distracting or disturbing for employees. Employees may ignore their core functions and other pertinent issues while continuously preparing for and updating the rolling budget. Frequent budgetary changes may make them wary of implementing any one particular version.
Preparation of rolling budgets is not advisable when the circumstances or conditions are not constantly changing. It may be a waste of your time and resources to prepare rolling budgets in unvarying environments. If your business is not exposed to extremely varying elements of commerce or the greater economy, a rolling budget will be an unwise choice.
If you assess your employee’s performance based on rolling budgets, you may limit opportunities for the employee to achieve targets before the budget is altered. The employee may not have sufficient time to improve her performance. Adjusting to changing factors may also increase work pressure and lead to demotivation.
Rolling budgets are usually part of larger master-budgeting and do not have a long-term perspective. Therefore, your vision and decisions may lack the tactical depth required for growing your business. You may be too focused on short-term goals, and you may lean toward micromanagement.