Definition: A rolling budget is a new, revised set of financial plans for the next accounting period used to replace the prior one in a continuous budgeting system. In other words, it’s a newly updated budget that takes the place of the old version when it expires.
What Does Rolling Budget Mean?
Most companies prepare budgets on a monthly, quarterly, or annual basis. These plans are used in the current period to set financial and performance goals and set benchmarks for the future. When the current period is over, the budgeting process begins again by creating a new plan for the next accounting period. Let’s take a look at an example.
Example
Let’s take a look at a monthly continuous budgeting system. Brad’s Machine Shop prepares monthly budgets six months out, so that it can prepare for upcoming demand and anticipate swings in production demand. In January, Brad prepares a financial plan for each month from January to June.
At the end of January, Brad evaluates his performance and analyzes the favorable and unfavorable variances between the actual numbers and the estimated ones. Based on the analysis, Brad can then take his previously made six-month plan and revise the remaining months (February through June). Brad also adds an additional month, July, on the end of the plan to make it a complete six-month plan again. This process repeats itself at the end of each month, so at the end of February the March through July plans are revised and an August one is added.
As you can see, when one budget expires a future one is added. This is why it’s called a rolling budget. When one expires, it is rolled over to the next period and the continuous cycle keeps moving. This is helpful for managers and cost accountants to always have a plan where the company is headed and what to expect from future periods.
