Static budgets and rolling forecasts are two drastically different approaches to achieving a similar goal - predicting the future finances of a business.
While static budgets continue to be the predominant choice among businesses, rolling forecasts provide a number of advantages that make them ideal for many companies. The ideal budgeting approach largely depends on your business model. The size, growth-rate, and industry fluctuations of your business can help you determine the ideal budgeting method for your company.
What Is a Static Budget?
With the right budgeting approach, you can achieve greater accuracy in less time.
Static budgets are fixed budget plans that don't change as the company grows and evolves. If the fixed annual sales budget of an organization is set at $500,000, that budget will remain the same, even if sales reach several million dollars. Static budgets also operate on a fixed timeframe. For instance, if a static budget is created for a 12-month period, that same budget plan is used for all 12 months, and after those 12 months are up, that budget is discarded and a new 12-month plan is created.
The rigidity of the static budget makes it ideal for some organizations, but hugely insufficient for others. For small businesses that experience consistent earnings throughout the year, experience little to no business growth, and are in a stable industry with few fluctuations, a static budget is an efficient means of anticipating annual budgeting needs.
What Is a Rolling Forecast?
Rolling forecasts will keep you ahead in the fast-paced world of business.
Unlike static budgets, rolling forecasts are updated regularly throughout the year to reflect changes in the industry or economy. It relies on an add/drop approach to forecasting that creates new forecast periods on a rolling basis. Businesses establish a set period, such as quarters or months, to update their forecast. At the end of every period, a new period is added to the forecast, so businesses can regularly adapt their financial plan to reflect recent trends.
What's Best for Your Business?
There are pros and cons to each budgeting style, and the method chosen will largely depend on your business model. Ask yourself a few questions to gauge your basic needs.
- Has your current budgeting approach been accurate?
- How fast is your business growing?
- What size is your business?
- Does your business need to respond rapidly to industry or consumer changes?
- Does your revenue and profits fluctuate throughout the year?
- Can you accurately predict next year's results?
If you're currently relying on a static budget and you've noticed that the numbers are rarely accurate, there are several things that could be to blame. If your business is growing quickly or experiences a lot of fluctuations, a static budget will be unable to provide the flexibility and agility needed to accurately reflect finances.
The two approaches are actually complementary. When implemented as an extension of the annual budget, rolling forecasts allow you to routinely reflect on your original budget and make adjustments to future periods. In this case, your plans can continuously change and adapt to the needs of your dynamic business. There are some organizations who have embraced the "beyond budgeting" concept and were able to eliminate the annual budget after rolling forecasts were in place.
Rolling forecasts make it easier to create more accurate plans, particularly for fast-growing and dynamic businesses that have difficulty pinning down future finances. While static budgets are often sufficient for small businesses that experience little growth or fluctuation, they are rarely sufficient for fast-growing, more dynamic companies. Yet, despite the advantages, many businesses avoid rolling forecasts, due to the increased workload it entails in terms of collecting and rolling up data. This is especially hard if your company is relying on spreadsheets and email to manage the budgeting and forecasting process.
With cloud-based EPM software, you can streamline budgeting and create rolling forecasts more accurately and efficiently, allowing your business to leverage the benefits, without prolonging each planning cycle. This whitepaper, Best Practices in Rolling Forecasts, provides additional insights on the use of rolling forecasts.