Budgeting methods
A budget helps you get an idea of where your company is spending its money and how well will its money will last during the budget period. At the same time, the budget functions as your company’s monetary operating plan. Fixed and rolling budget are the most common ways of compiling a budget. Select the budgeting method that best suits your company.
A fixed budget is a traditional and widely used budgeting method and it is also considered simple. In this method, the budget is prepared for the whole budget period and approved shortly before the end of the current budget period. When the budget term is over, the actual numbers will be compared with the original budget. The comparison helps preparing the next fixed budget.
If your company uses a fixed budget, its money must actually last for the course of the entire budget period. You cannot change a fixed budget while a budget period is still ongoing even if situations change. A fixed budget is a good choice if your company’s operations remain predictable and more or less unchanged over the whole budget period.
A fixed budget is also a stable and efficient budgeting method as it sets clear and concrete economic targets for your company. However, it does not easily adapt to changes in operations. For this reason, it is not well-suited for sectors characterised by rapid changes, especially if the budget periods are long.
If your company operates in a market that is quick to change, or on a project-basis, a rolling budget is a good alternative. It involves constantly moving ahead the end of the budget period. For example, a new month or quarter is added to the budget after each month or quarter. The interval for updates suitable for your company depends on your company’s business and its predictability.
In a rolling budget, your company will always be aware of its operating plan and budget for example for the coming one-year period, whichever time of year it is. This means that a rolling budget can specify projections, facilitate planning your company’s operations, and support decision-making. It also makes it relatively easy for your company to regulate the sufficiency of its funds.
A rolling budget must be updated several times during the year, and for this reason it is often considered a work-intensive method. However, revising the budget is easier if you have the right budgeting tools, your accounts are up to date and the outlook is clear.
A revised budget is similar to a fixed budget to the extent that a revised budget is also prepared for the whole budget period. However, it is revised, corrected and specified at certain intervals during the budget period, for example on a quarterly basis.
Each time your company revises its budget, it must determine whether there is any need to change the budget for the remaining period. The revisions and corrections help your company adjust to external changes, which affect your company’s operating plan and through this also its budget.
A revised budget is more flexible than a fixed budget. It is fairly up to date and adaptable to a changing operating environment. It usually allows your company to reach its objectives more easily than if you were using a fixed budget.
Preparing a revised budget for periods such as one year is also relatively simple. Nevertheless, checking the budget more than once during the budget period may mean extra work for your company.
If your company’s activities or turnover is subject to seasonal variation, you should consider preparing a flexible budget. A flexible budget adjusts to the changes in the volume of business activity.
If your company uses a flexible budget, you must prepare alternative budgets for different seasons depending on the volume of your company’s operations. Always give the same rates for your company’s rental and other fixed costs, but adjust any other changing expenditure based on the volume of your company’s operations. For example, if your company manufactures some product, allocate more funds to manufacturing costs to the budget for a busy period and less funds to that for a quiet period.
A flexible budged allows your company allocate its money sensibly and appropriately during different periods. This is a highly useful alternative, particularly for companies in an industry with clear seasonal variation.