Rolling Budget

Rolling Budget Definition

Rolling budget is a continuous budget that is updated regularly when the earlier budget period expires, or we can say it is an extension of the current period budget. Rolling Budget is also known as budget rollover.

Types of Rolling Budget

Below are the types of rolling budgets.

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#1 – Sales Budget/Revenue Budget

Sales BudgetSales BudgetThe sales budget forecasts the quantity that the entity expects to sell and the amount of revenue generated from the sale of such amount expected in the future, based on the management’s judgment related to the competition, economic conditions, market demands, and market demands past trends.read more the very first budget that an enterprise has to prepare because all other budgets depend on the revenue budget. In this budget, enterprises are forecasting their sales in terms of Value and Volume. In preparing the sales budget below, factors have been considered by the sales manager.

• The trend of the earlier period i.e., Average growth of last 5 – 6 years
• Total Market potential of the coming year
• Government Policies
• Seasonal demands

#2 – Production Budget

The production budget purely depends upon the sales budget. In the production budget product manager estimates the monthly volume production according to the demand and also maintains the inventory level. In this budget, the cost of production is also estimated. Below are the factors of the production budgetProduction BudgetProduction Budget is a type of financial planning that relates to the units of product that management believes the company should produce in the coming period to match the estimated sales quantity, which is based on the management's assessment of market competition, economic conditions, production capacity, consumer prevailing market demands, and historical trends.read more.

• Raw Material
• Labor
• Plant & Machinery

#3 – Overhead Budget

In this budget, enterprises are estimating the cost of indirect material, indirect laborIndirect LaborEmployees who are not directly involved in the production of finished goods or services are classified as indirect labour. They do, however, contribute to the production and manufacturing ecosystem. Accountants, human resources, sales and marketing teams, are it's examples.read more, operational cost like rent, electricity, water, traveling, and many others. The overhead budget is divided into two parts one is fixed overhead, and one is variable overhead. It is also known as the expense budget.

#4 – Financial Budget

In the financial budget, the enterprise has to forecast the requirement of funds for running the business, whether it is long term or short term. In this budget, the company is also planning to invest their excess cash in that manner so that they can get a maximum return, or if the money is required for business, then they can pull out that money from the investment easily.

#5 – Capital Expenditure Budget

It contains forecasting of capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more like expenditure on Plant & Equipment, Machinery, Land & building, etc.

#6 – Master Budget

A master budgetMaster BudgetMaster Budget is an all-inclusive financial planning document that covers all the smaller budgets of the Company to present a detailed view of its financial standing. It includes cash flow forecast, capital investments, expected future sales, & production levels etc. read more is a summary of all the above budget, which is verified by top management after taking inputs from various functional heads. It also shows the profitability of the business.

Methods of Rolling Budget

Below are the methods of Rolling Budgeting

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#1 – Incremental Budgeting

In this method of incremental budgeting, the budget is prepared by adding or subtracting a certain percentage in last year’s budget based on actual figures for last year to ascertain the current year budget. It is a traditional budgetingTraditional BudgetingTraditional budgeting is one of the ways for preparing a company's budget for a specific time period in which the previous year's budget is used as the base for preparing the current year's budget.read more.

#2 – Activity-Based Budgeting

Activity-Based budgetingActivity-Based BudgetingActivity-based Budgeting is a budgeting process in which the firm first identifies, analyses, and researches the activities that determine the cost of the company and, based on the results, prepares the budget.read more is done for each activity that needs to perform to achieve the business goal and make plans to reduce the cost of activity so that profit can be maximized. E.g., If the company sets a target of $ 1000 Million sales, then the company has to first identify those activities which need to perform for achieving this target.

#3 – Zero-Based Budgeting

Zero-Based budgetingZero-Based BudgetingZero-based budgeting refers to the budgeting method whereby the expenses and income on the list start from zero. There is no reference point for the budget items, and each of these expenses is individually interpreted as per requirement.read more will start from zero, which means there is no history of any department, activity, expense head, and revenue. Zero base budgeting is prepared on the inputs given by each activity manager with their experience and justification. This method of budgeting is used for cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies.read more or assessing the potential saving of cost.

#4 – Kaizen Budgeting

Aggressive and innovative organizations use this method of budgeting. It means continuous improvement in their efficiency, quality, and productivity.

Example of Rolling Budget

Below is the example of a rolling budget.

Below is the rolling budget of Wal-Mart Inc for the year 2019, where the company is preparing a rolling budget for each quarter. This rolling budget below points has been considered in the preparation of the budget.

• Assumed Value and Volume growth at a rate of 10% for each quarter;
• Direct Material and Direct labor are the variable costs which directly related to the production of finished goods.
• Variable overhead also depends on the production like freight expenses.
• Fixed overheads are not dependent upon production. Therefore, it is the same for all the four quarters, like Rent expenses.

Walart Inc for the Year 2018

Particulars	Q1	Q2	Q3	Q4
Volume	100000	110000	121000	133100
Sales/Revenue	$5,000	$5,500	$6,050	$6,655
Direct Material	$1,500	$1,620	$1,750	$1,890
Direct Labour	$800	$880	$968	$1,065
Variable Overhead	$500	$550	$605	$666
Fixed Overhead	$300	$300	$300	$300
Profit	1,900	2,150	2,427	2,735

The actual results of Q1 have been released. Below is the variance analysis of the Actual Budget.

Below are the observations of Variance AnalysisVariance AnalysisVariance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more –

• Volume and Value have achieved 105% of the Budget.
• Direct material and direct labor costsDirect Labor CostsDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more have changed according to the cost of goods sold.
• Variable Overhead has increased by 1.43% because the budgeted variable overhead was 10% of sales, whereas actual variable overhead comes 11.43% of sales.
• Actual Fixed Overhead was the same as budgeted.
• Profit MarginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more has been reduced by 1.62% because of the increase in variable overhead.

Note

On the basis of actual performance, the company can modify the budget of next quarter if management believes that the same pattern will continue for other quarters also.

Advantages of Rolling Budget

• Rolling budget does not require more time because it is just an extension of the earlier budget with necessary changes.
• In a rolling budget, it is easy to change the budget because of any unexpected events occur.
• In this budget, it is easy to assess the actual performance against budget.
• Rolling Budget brings better understanding, responsibility, and objectives between employees of the company.
• The rolling budget helps in finding the strength and weaknesses of the organization, and accordingly, steps can be taken to remove the weakness.

Disadvantages of Rolling Budget

• Rolling budget requires a robust system and skilled manpower.
• The rolling budget creates confusion and disturbs the employee because of constant changes.
• Rolling budget is not advisable for those organizations where conditions are not changing frequently.
• If the target sets in budgets are difficult to achieve, then it demotivated the employee of organizations.
• It is a very costly affair because it requires additional manpower for regular updating of rolling budget and analysis of actual performance vs. budget.

Conclusion

Rolling budget is a continuous process of budgeting where budget is prepared quarterly/half-yearly /Early on the basis of the last budget. In rolling budget assessment is happening at the end of each budget period. Rolling budget gives clear understanding among employees about the business objective and what to do for achieving the objective. For a successful budget, it is vital that information taken for budget preparation is correct; otherwise, it will give a negative impact on the business as well as employees.

Recommended Articles

This has been a guide to Rolling Budget and its definition. Here we discuss types, methods of rolling budget along with an example, advantages, and disadvantages. You can learn more about finance from the following articles –

• Rolling Forecast
• Pass Through Entity
• Risk Budgeting
• Flexible Budget