A Closer Look at Rolling Budgets: The Challenges Associated with an Effective Implementation of Rolling Budgets Are Management Challenges, and Software Technology Can Only Become Part of the Solution When Managers Are Ready to Use It to Enhance Their Decision Making

Article excerpt

Businesses are increasingly using rolling budgets. Also called continuous budgeting, rolling budgets always involve maintaining a plan for a specified time period in the future. To implement rolling budgets, many advocate leveraging new technological resources, which means software. It must be understood that the technology (e.g., bolt-on software packages) is not the solution. It is a tool by which and an environment in which management can have the opportunity to develop solution sets.

Published surveys of financial officers of the largest industrial companies in the United States, Australia, Holland, Japan, and the United Kingdom show a number of interesting similarities as well as differences in budgeting practices across countries. (1) First, the use of master budgets is very widespread in all of these countries. Another significant finding is that financial managers in many countries distinguish between cost behavior patterns--variable versus fixed costs--for a common reason: They want to prepare more meaningful budgets by building flexibility into the model.

How do these facts impact the concept of rolling budgets? Rolling budgets always involve maintaining a plan for a specified time period in the future. This result is achieved by adding a new time period in the future as the current time period that ended is dropped. Large companies, such as Electrolux and General Electric, prepare strategic plans and then integrate annual operating budgets that are divided into four-quarter rolling budgets, and smaller high-tech public companies, such as Keithley Instruments in Solon, Ohio, follow a similar pattern of planning.

The annual operating budgets are prepared based upon best estimates of what management expects to occur and wants to achieve during the coming year. Flexibility is built into the process by considering how costs and revenues will change if different levels of activity occur (e.g., flexible budgeting), and each quarter's changes are made to reflect changes in the economic and financial environment--things such as what the competition is doing, how the economy is spending for capital goods, and any planned changes in their product mix (adding or dropping a product line). In short, sound managers operate an entity with one eye always on the horizon, and a well-prepared business plan as reflected in a "flexible rolling budget" can be one of the financial managers' best tools to assist them in their role of planning and controlling the operations of this company.

In his article "Budgets on a Roll," Randy Myers identified a number of problems with annual static budgets. (2) A closer look, however, reveals that these problems were really management or human resource problems, where the proper development and use of budgets as just described was simply not understood. One example cited was that of an "account director" who would land several large clients "early in the year and make his annual budget" and then "coast" the rest of the year. This is not a problem with the budgeting process. It is a prime example of inept management and human resource functions that do not know how to plan and develop proper incentive systems.

COSTLY SOFTWARE CANNOT HELP POOR MANAGEMENT

The implementation of costly software based upon fixed algorithms that merely permit one to roll the budget forward on a monthly basis without looking at the big picture is not a solution for poor planning or for a lackluster management team. If the management of any company allows its sales force to play such games in the planning process, shareholders likely would not value the financial expenditure for software that merely accelerates the game. Maybe heads should roll before the budget rolls.

Electronic spreadsheets such as Microsoft's Excel may be widely used for supporting the budgeting process, but if the data to populate the spreadsheets does not come from the corporate database directly, maintaining data integrity is a real problem. …