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Rolling Budget

Updated on April 19, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Rolling Budget Meaning

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

Key Takeaways

  • A rolling budget means a continuous budget regularly upgraded if the earlier budget expires. It is also a current budget extension. It is also called a budget rollover.
  • Sales or revenue, production, overhead, financial, capital expenditure budget, and master budget are the types of rolling budgets.
  • Incremental, activity-based, zero-based, and Kaizen budgeting are the rolling budgeting methods.
  • It gives the employees a clear understanding of the business objective and the targets they need to achieve.

Types of Rolling Budget

Below are the types of rolling budgets:

Rolling Budget Types

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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 is the first budget that an enterprise must prepare because all other budgets depend on revenue/sales. In this budget, enterprises forecast their sales in terms of value and volume. In preparing the sales budget, the sales manager usually considers the below factors.

  • 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

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#2 – Production Budget

The production budget purely depends upon the sales budget. Therefore, the product manager estimates the monthly production volume according to the demand and maintains the inventory level in the production budget. In this budget, the cost of production is also evaluated. 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.

#3 – Overhead Budget

In this budget, enterprises estimate 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, and operational expensesOperational ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more like rent, electricity, water, traveling, and much more. 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

The enterprise has to forecast the fund’s long-term or short-term requirements for running the business within the financial budget. The company also plans to invest its excess cash to get a maximum return in this budget. In such a case, if the money is required for the business, they can easily pull out that money from the investment.

#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

After taking inputs from various functional heads, 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 summarizes all the above budgets, verified by top management. It also shows the profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more of the business.

Methods of Rolling Budget

Below are the methods of rolling budgeting:

Methods of Rolling Budget

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#1 – Incremental Budgeting

In this method, the budget is prepared by adding or subtracting a certain percentage in last year’s budget based on the actual figures for last year to ascertain the current year’s budget. It is 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 be performed to achieve business goals. It also helps to make plans to reduce the activity cost so that profit can be maximized. For example, if a company sets a target of $1,000 million in sales, the company has first to identify those activities that need to be performed to achieve 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 starts from zero, which means there is no history of any department, activity, expense head, or revenue. Instead, zero-base budgeting is prepared on the inputs given by each activity manager with their experience and justification. This budgeting method 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 efficiency, quality, and productivity.

Example of Rolling Budget

Below is an example of a rolling budget.

You can download this Rolling Budget Excel template here – Rolling Budget Excel template

Below is the rolling budget of Walmart Inc for the year 2019, where the company is preparing a rolling budget for each quarter. The points mentioned below have been considered in the preparation of this rolling budget:

  • Assumed value and volume growth at a rate of 10% for each quarter;
  • Direct material and direct labor are the variable costs 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.

Walmart Inc for the Year 2018

ParticularsQ1Q2Q3Q4
Volume100000110000121000133100
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
Profit1,9002,1502,4272,735

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

Note

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

Rolling Budget Example 1.1

Advantages of Rolling Budget

  • Rolling the budget does not require more time because it is just an extension of the earlier budget with necessary changes.
  • It is easy to change the budget if any unexpected event occurs.
  • It is easy to assess the actual performance against the budget in this budget.
  • Rolling budget brings better understanding, responsibility, and objectives among the company’s employees.
  • The rolling budget helps find the organization’s strengths and weaknesses and can take steps to remove the defect accordingly.

Disadvantages of Rolling Budget

  • A rolling budget requires a robust system and a skilled workforce.
  • The rolling budget creates confusion and disturbs employees because of constant changes.
  • A rolling budget is not advisable for those organizations where conditions are not changing frequently.
  • If the budget target sets are challenging to achieve, it demotivates employees.
  • It is a very costly affair because it requires additional staffing to regularly update the rolling budget and analyze the actual performance vs. the budget.

Conclusion

A rolling budget is a continuous process of budgeting where the budget is prepared quarterly/half-yearly/early based on the last budget. A rolling budget assessment happens at the end of each budget period. Rolling budget gives a clear understanding among employees of the business objective and what to do to achieve the goal. For a successful budget, information taken for budget preparation must be correct; otherwise, it will harm the business and employees.

Frequently Asked Questions (FAQs)

What is rolling budget vs flexible budget?

A rolling budget is different than a flexible budget. A rolling budget is flexible as one can change the financial period. In contrast, in a flexible budget, the characteristics are limited to the current period.

What does a rolling budget do?

The rolling budget considers the most recent actuals to predict the future budget. Therefore, the end outcome is a more appropriate budget as it depends on current actuals.

What is rolling budget vs traditional budget?

The company creates a traditional budget once a year. In comparison, a rolling is made once a year. It is upgraded monthly or quarterly.

Why have a rolling budget?

It is an option for static budgeting. However, one must take a rolling budget to control and decide the business’s finances. In addition, a rolling budget provides flexibility and long-term planning to the company’s business by allowing them to determine the actual progress of the firm regularly and annually.

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

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Comments

  1. Deepak Upadhyay says

    Nicely expressed.

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