This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
In this era of globalization, we can see that the business world is increasingly using rolling budgets. Rolling budget is also known as continuous budgeting. (Lynn & Madison, 2004) In the highly competitive business environment, business that wants to be surviving must be flexible and innovative primarily through new product and service development, while improving productivity and customer services. However, if companies that are using fixed budget to cover a specific frame of time, it may be difficult to incorporating the effects of innovation into the budgets. These fixed budgets may be review at periodicals so that adjustments and corrections can be making if needed, but the basic budgets remain the same throughout the period. In an effort to resolve the problem of rigidity in a fixed budgets, some corporate, especially those in a rapid changing industries, recommended to make budgeting and forecasting more often to keep pace with changing circumstances. These areas include methodologies of rolling budgets. (Hayes, 2002)
An advantage of rolling budgets is concerning the maintenance for a plan at a specified time in the future. Rolling budget is updated a few times in the basis of twelve-month budget each year for example once each quarter. (Myers, 2001) This method is considered better adapted for the changing circumstances because they solve a very uncommon budget, therefore more accurate and related issues predictions are resulted. Rolling budget objective is to give management the opportunity to modify its project, however, it is more important to apply forecasts that are even more accurate and projects for the following few months. Accurate forecasting and planning for additional management cost and great effort of producing few computations should be balance with more rather than just one when the rolling budgets are applying. (Hayes, 2002)
The following advantages from rolling budget is it could encourage and instruct managers to think and ensure about planning as a continuous process in the future, instead of thinking as a mandatory event and act as composition to an annual exercise. (Finkler, 1999) Rolling budget require manager to produce a budget quarterly in order able accounting staff compared the actual results against the latest forecast as soon as possible after end of a period rather than compare with annual budget because the information given might be out of date. It may result in useless to make comparison and forecast or as a reference for decision-making. For example, cost of direct material at the beginning of the year might be different with cost of direct material at the end of the year. The changes of price not up to date, therefore managers not able to forecast the budget accurately and produce useful information to the management for any comparison, adjustment and decision-making between the year. Rolling budget could also help in planning and control for a company overall productivity, profit and budget. (Myers, 2001) Managers could make a better decision if they can plan for the future from using rolling budget such as purchase material in bulk to get discount, negotiate with supplier about the date of deliveries, and order in low price with six month of lead-time, rather than purchase at last minute in very high price. (Finkler, 1999)
Furthermore, rolling budget is top management personnel has access to the most recent information through the budgeting process, and thus maintain vigilance to the problem and make correcting when it is require. For example, managers realize volume of material have been used excess the amount for the same project at the past, by review the most recent information and past information managers can figure the problem as soon as possible and rectify it to ensure the volume of material not excess significantly. From rolling budgets method, managers are revising regularly all the information and process, consequently uncertainty is reduced. (Lynn & Madison, 2004) The next advantage is an opportunity to provide more ââ‚¬Å“real-timeââ‚¬Â response to this rapidly changing environment in business world. Rolling budget also reduce the budget period to accomplish a prompt review of operational plans and timely amendments of the budget, in response to the changes in the business environment. Companies nowadays can obtain highest profit or deduct any unnecessary expenses in a project through budgeting more accurately. Last advantage that would be mention in rolling budget is important events and changes can be trigger although planning is not dictating by the calendar. Planning and control is based on a recent updated plan. (Drury, 2007)
Disadvantages of using rolling budget are time consuming and expensive as a number of budgets must be produced during the year. Rolling budget prepares quarterly or in monthly basis, therefore it has to prepare every three-month or every month. Moreover, costs occur when each time preparing the rolling budget. Staff uses six to seven days each quarter to preparing the rolling budget, it is time consuming and more costly than prepare annually. (Finkler, 2004) Notwithstanding, rolling budget can provide more accurate and useful information for managers, however, the workload of managers that require to prepare budget by using rolling budget are more heavy than prepare by using traditional method. According to traditional method, managers only have to prepare annually which mean once a year, whereas, using rolling budget have to prepare according to quarterly basis or monthly basis. Consequently, workload for the managers who prepares budget process increased and heavy burden incur. (Hayes, 2002) Apart from that, each amends budget may needed adjustment of standards or stock valuations that is time consuming for the particular manager and employee to prepare. One of the problems with rolling budgets is that the performance forecast by the common budget tends to steaming in successive revisions causing the totals of the revised budgets to seldom sum up to the original expectation. (Otley & David)