Budgets are no longer unchanging entities. In the midst of the information age, with transactions moving faster, business spanning the globe, and technology providing helpful tools to re-plan and re-think budgets, many small businesses are adopting a new way of thinking about their financials.
Conventional budgeting wisdom offered this guidance to small business owners: create a budget and don’t stray from it. An article from CFO Magazine points out that traditional budgeting is expensive, time-consuming, and quickly becomes out-of-date within a few months.
The benefits of rolling forecasting are vast, but overall, the methodology allows small (and large) businesses greater ability to adapt to what many people say is a volatile financial environment. Rather than rely on a set annual forecast for the budget, it is a method that enables a company to continuously update their financial plan on a day-by-day basis to fit challenges or opportunities that arise.
If your small business is ready for a new way to think about budgeting, consider three key benefits of rolling forecasting and flexible budgeting:
- It allows you to see past the present fiscal year. Companies can see past the immediate future and think about long-term financial goals. Rolling forecasting is a continual model that adds future periods as time continues – so once a month has passed, an extra month is added to the rolling forecast period. Therefore, the company never reaches “the end” of the budget period.
- It allows for uncertainty. Budgets always make assumptions about a year’s success and many factors that you can’t control. Rolling forecasting allows for a business to get some things wrong and regroup. Business conditions are constantly changing, and in uncertain economic times, businesses need the leeway to be wrong, and the wiggle room to make changes.
- It keeps your data relevant. By focusing on the metrics that drive decision-making and analysis, companies have a better idea of the company’s present situation and don’t get bogged down in irrelevant data.
- It keeps strategy close. Rolling forecasting allows financial managers to analyze strategy constantly and envision scenarios that create new goals and targets.
- It provides a reality check. Budget owners can quickly get a sense for where the budget is at. Rather than adjust numbers to simply meet a year-end goal, budget owners can make decisions based on the company’s present situation and future goals.Ultimately, it allows for innovation.
With many financial managers switching the way they think about budgeting, a small company would be wise to consider rolling forecasting rather than a fixed, traditional budget.
Financial Growth Chart Photo via Shutterstock
About The Guest Author: Brooke McDonald is a writer and blogger for California-based Spicer-Baer Associates, creators of My Department Plan, business budgeting software to help departments effectively track, plan, and report their financial data.