A budget is: 'A quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows.'
So how do you begin one and which one is right for your company?
Budgeting practices are heavily influenced by the organisation's management style and can vary considerably, but the theory is common to all. Given the relationship between budgets and planning.
Over the past decade, alternative approaches to traditional budgeting have been debated and sometimes trialled. These include better budgeting, advanced budgeting and beyond budgeting.
The top 3 budgeting methods used by CFO's today are a rolling budget, last year plus x% and bottom up budgeting.
A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.
A rolling budget calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budget updating activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a rolling basis, the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to a rolling budget, with fewer people involved in the process.
Advantages and Disadvantages of the Rolling Budget
This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget, since the budget periods prior to the incremental month just added are not revised.
Example of a Rolling Budget
ABC Company has adopted a 12-month planning horizon, and its initial budget is from January to December. After a month passes, the January period is complete, so it now adds a budget for the following January, so that it still has a 12-month planning horizon that extends from February of the current year to January of the next year.
This type of budgeting is very common especially in a seasonal or an established business with enough data to rely on to build a budget based on last year.
