How to Choose between Rolling Forecasts and a Static Budget
How do you know if your company is using the best budget and forecast model?
Most companies use a traditional, static budget to make predictions about their expected revenue and planned expenses. It’s the tried-and-true method people have relied on for years. But it’s not always the best.
Traditional budgets cannot be easily adjusted in response to a rapidly changing business environment. That’s why quite a few companies are starting to use a rolling forecast model. This type of forecasting is more agile and dynamic, letting your company adjust as circumstances change.
There’s no easy answer to the question, “Which budgeting model is right for you?” The static budgets and rolling forecast models each have different pros and cons. Learning about those pros and cons, and how they’ll affect your business, can help you decide whether rolling forecasts or a static budget are the best fit for your company.
What’s the Difference Between Budget and Forecast?
Traditional budgets are fixed financial plans calculated for a set period of time, typically one year. It involves a forecast of revenue and expenses for that period of time. These budgets remain static regardless of fluctuations in the market or business earnings during the year. For example, a marketing budget set at $50,000 for the 12-month budget period stays at $50,000 for the entire 12 months.
Rolling forecasts are designed to change and adapt throughout the year. Businesses set periods for re-evaluation, typically on a monthly or quarterly basis, and adjust the budget model to reflect industry or economic changes. For example, you might set a marketing budget at $12,500 per quarter for the next four quarters. Then at the next evaluation, you can respond to changes in sales by raising or lowering this number for the next four quarters.
Choose Static If …
A traditional budget helps your company clarify where to spend resources. It also provides feedback for making strategic decisions. The downside is that this sort of budget doesn’t react to what’s actually happening in the business during the budget period, which limits its usefulness if large changes impact your business.
The rigidity of a static budget makes it a good choice for businesses that experience little fluctuation to their business model. There’s no need to switch to rolling forecasts in a business characterized by minimal growth, predictable sales, and a stable industry.
Static budgets are simple and less time consuming, which makes them a good choice for small businesses. Keeping up with a rolling forecast involves large amounts of time devoted to tracking market trends and re-doing your budget. If you’re not ready to do that in your financial department, then a static budget is the right choice for you.
Choose Rolling If …
A static budget can’t accurately predict the financial needs of businesses experiencing rapid growth and/or industry fluctuations. It simply isn’t designed to react if the economic environment shifts or you lose (or gain) a major customer. A traditional budget becomes outdated almost as soon as you’ve completed it. And to make things worse, it just becomes more and more outdated the longer you use it.
Rolling forecasts do require more work to collect data and adjust financial predictions. You’ll need increased oversight, accurate data, and time devoted to adjusting the forecast if you want to take full advantage of rolling forecasts. But that extra work will pay off in businesses where static budgets just don’t remain accurate enough to be of much use.
When you implement a rolling forecast, you create a business model that can adjust in response to new data. This lets you more rapidly adapt the financial plan to changes and keep it up-to-date. It also increases your control over finances.
What About Both?
It might seem that rolling forecasts are an obvious improvement over static, traditional budgets. It’s not a choice the majority of companies are making, though. In fact, an EPM Channel survey reported only 42% of companies are using a rolling forecast.
This same survey found that 20% of companies polled said that they had tried and failed to implement a rolling forecast. Since it’s constantly changing, a rolling forecast is much more difficult to maintain than a static budget. We cover best practices for implementing rolling forecasts in another article.
The companies who have implemented a rolling forecast typically do so alongside a static budget. They’ve found that the traditional budget acts as a useful guidepost while the rolling forecast helps keep things up-to-date. This model involves both budget and forecast.
In both these types of financial planning, you can’t make a reliable budget or forecast unless you’re working with reliable data. For increased control over budgets and better access to your data, consider investing in business process improvement software.
NextProcess offers the only suite of software that provides modules to power and simplify your capital project management, procurement and purchase orders, accounts payable, travel & expense, and payment disbursements. We designed these modules to work perfectly together and seamlessly integrate with systems like Oracle, Microsoft Dynamics, and Netsuite.
We make our software implementation quick and simple so you can start enjoying the benefits of improved oversight, more accurate data, and faster processing as soon as possible. Contact us today to learn how our software can help you control your finances and make more accurate financial predictions.