Rolling Forecast or Fixed Budget?

There’s a lot of noise on the accounting circuits about whether a company should maintain a fixed budget or employ a rolling forecast (some refer to this as changing the budget midway through the game). The arguments on both sides are interesting and compelling.

This reminds me of the arguments years ago on zero based budgeting (during the presidency of Jimmy Carter, this was hot). So now we have the conventional budget, the zero based budget and the rolling budget, not to mention numerous variations on those themes (action based activities, milestone budgets to name a couple). Its budget season now, so let’s look at some of the arguments raised in support of the rolling budget along with other considerations.

Most conventional budgets are done in detail, published to management and then shelved. A rolling forecast is a live document which is constantly re-examined and updated. A definite positive in favor of the rolling forecast is that by revisiting previous assumptions as you move the periods forward, should lead to better accuracy with the periods that are re-evaluated. Further, the staff working on the budget gains a better familiarity with the drivers that form the forecast. This multiple exposure helps to build a better understanding of what outside forces influences those factors.

A number of companies are employing the rolling forecast while continuing the annual budget for incentive compensation programs and to monitoring that the company is trending as expected and meeting long term plans. The rolling forecast in conjunction with the traditional budget allows those companies to respond rapidly to key events that impact the business without losing the bigger long term picture and goals. When both methods are employed, a business can stay on tract from a conventional standing and keep sharp to the changing environment.

To create the perfect storm of keeping your thumb on the pulse of the business and dynamically manage the business, add weekly monitoring of the Key Performance Indicators. Maintaining six to fifteen key performance indicators with targets each week, allows management to truly focus on the business drivers and keep the business on target whether it’s a rolling forecast or an annual budget.

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