Fixed Budget vs. Rolling Budget

Attribute	Fixed Budget	Rolling Budget
Definition	Set budget amount that does not change	Flexible budget that is updated regularly
Time Period	Usually for a fiscal year	Can be for shorter time periods
Flexibility	Less flexible	More flexible
Accuracy	Less accurate	More accurate
Adaptability	Less adaptable to changes	More adaptable to changes

Definition

A fixed budget is a financial plan that remains unchanged over a specific period, typically a fiscal year. It is based on estimates and assumptions made at the beginning of the period and does not adjust to changes in circumstances. On the other hand, a rolling budget is a continuous budgeting process where the budget is updated regularly, usually on a monthly or quarterly basis. It allows for adjustments to be made based on actual performance and changing conditions.

Flexibility

One of the key differences between fixed and rolling budgets is the level of flexibility they offer. Fixed budgets are rigid and do not allow for changes once they are set. This can be a disadvantage in a dynamic business environment where conditions are constantly evolving. Rolling budgets, on the other hand, are more flexible as they can be adjusted to reflect changes in the business environment, allowing for better decision-making and resource allocation.

Accuracy

Fixed budgets are based on estimates and assumptions made at the beginning of the period, which may not always be accurate. As a result, there is a risk that the budget may not align with actual performance, leading to potential financial discrepancies. Rolling budgets, on the other hand, are updated regularly based on actual performance data, which can lead to more accurate budgeting and forecasting. This can help businesses make more informed decisions and better manage their finances.

Time Horizon

Fixed budgets typically cover a specific period, such as a fiscal year, and do not change during that time. This can make it challenging to adapt to unforeseen circumstances or changes in the business environment. Rolling budgets, on the other hand, have a shorter time horizon and are updated regularly, allowing for more timely adjustments to be made. This can help businesses stay agile and responsive to changing market conditions.

Performance Evaluation

Fixed budgets are often used as a benchmark for evaluating performance, as they provide a set target to measure against. However, if the budget is not aligned with actual performance, it may not accurately reflect the success or failure of the business. Rolling budgets, on the other hand, are updated based on actual performance data, providing a more accurate basis for performance evaluation. This can help businesses identify areas for improvement and make necessary adjustments to achieve their financial goals.

Cost Control

Fixed budgets can be effective for controlling costs, as they provide a set limit on spending for a specific period. However, if the budget is too rigid, it may hinder the ability to invest in growth opportunities or respond to changing market conditions. Rolling budgets, on the other hand, allow for more flexibility in cost control, as they can be adjusted to reflect changes in the business environment. This can help businesses allocate resources more effectively and make strategic investments to drive growth.

Conclusion

In conclusion, both fixed and rolling budgets have their own advantages and disadvantages. Fixed budgets provide a stable financial plan but lack flexibility and may not accurately reflect actual performance. Rolling budgets, on the other hand, offer more flexibility and accuracy but require more frequent updates and monitoring. Ultimately, the choice between fixed and rolling budgets will depend on the specific needs and goals of the business, as well as the level of uncertainty and volatility in the market.