The Disadvantages of a Rolling Forecasting Method

by Billie Nordmeyer Google

It’s difficult to align a company’s financial model with its operating realities. For this reason, a rolling forecast comes in handy because it allows you to adjust an existing forecast to reflect new information regarding competition and other aspects of the company’s economic environment. For instance, you can update a rolling forecast with current information on product costs and other key business drivers, such as sales per day, customer acquisition costs and shipping costs. This primary advantage of a rolling forecast, however, does not mean that it’s a perfect forecasting method.

Expensive to Maintain

When you revise a rolling budget, you typically drop one budget period and add another as well as revise budget figures to ensure each budget period incorporates the company’s most recent operating results. For example, assume you create a monthly budget for the accounting period January 2024 to December 2024. If you later drop the January 2024 budget and add a January 2025 budget, you have a rolling budget that continues to cover a 12-month period -- just a different 12-month period. With a rolling budget, rather than producing and approving one budget for a particular chronological period, you produce and approve multiple budgets, each of which incorporates some portion of the previous budget. Because you revise a rolling budget on a monthly, quarterly, yearly or more frequent basis, the budget process is time-consuming and resource-intensive and therefore expensive to maintain.

Hides Budget Variances

The budget variances that arise due to changes in a company’s operating environment are incorporated in a rolling budget, which effectively eliminates the variance between actual and planned costs as of a particular point-in-time. From an operational perspective, because the budget is amended to incorporate the budget variances, it can be difficult to track individual variances. As a result, the value of the budget as a gauge of the value of a forecasting method, an individual’s accomplishments or a department’s performance is diminished. In fact, the rolling budget might be used to intentionally smooth over variances that might otherwise indicate the presence of performance issues or a need to revise a business strategy to better accommodate the current operating environment.

Resource-Intensive Preparation

You can update a rolling budget on a monthly, quarterly or yearly basis. During the update, the most recent period is deleted, and a new period is appended to the end of the current budget. In the process, you revise the entire budget to reflect changes in the company’s operating environment. In some cases, you might create the budget for the more immediate periods-of-time in greater detail than that pertaining to later time frames. Each revision requires the input and approval of members of your company’s management team. Consequently, the managers’ time is spent on the budget process rather than on operational issues, which can negatively affect the company’s performance.

Evolving Management Objectives

Changes to a rolling budget effectively change managers’ objectives. Because a manager may believe he is more likely to achieve the objectives set by the original budget than the objectives set with a revised rolling budget, he may not fully commit to the budget process. In addition, by revising the budget during the time allotted to managers to accomplish particular objectives, you may lessen the probability that managers will achieve their goals, which is demotivating. Also, managers may view the rolling budget as a means to delay working toward particular operational goals. In general, the perpetual revision of the goals set by the budget iterations can be distressing to some managers.

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