What is a rolling budget?

A rolling budget is also known as a continuous budget, a perpetual budget, or a rolling horizon budget. We will use the following example to explain the meaning of a rolling budget.

Let’s assume that a company’s accounting year ends on each December 31. Prior to the start of the year 2011, the company prepares its annual budget which is detailed by month for January through December 2011. This budget could become a rolling budget if after January 2011 the company drops the budget for January 2011 and adds the budget for January 2012. This rolling budget now covers the one year, or 12-month, period of February 1, 2011 through January 31, 2012. At the end of February 2011, the rolling budget will drop February 2011 and will add February 2012. At this point the rolling budget will cover the one year period of March 1, 2011 through February 29, 2012.

The benefit of a rolling budget is that the company’s management will always have a budget that looks forward for one full year.

A rolling budget could use 3-month periods or quarters instead of months. Also, a company might have a 5-year rolling budget for capital expenditures. In this case a full year will be added to replace the year that has just ended. This 5-year rolling budget means that management will always have a 5-year planning horizon.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here

What are the benefits of a revenue budget?

The main benefit of a revenue budget is that it requires looking into the future. The revenue budget should contain the assumptions made about the future and the details about the number of units to be sold, the expected selling prices, and so on.

The budgeted amount of revenue is then compared to the budgeted amount of expenses in order to determine if the revenues are adequate. Learning of a potential problem before the year begins is a huge benefit because it allows for alternative actions to be developed prior to the start of the new year.

When an annual revenue budget is detailed by month, each month’s actual revenues can be compared to the budgeted amount. Similarly, the actual year-to-date revenues can be compared to the budgeted revenues for the same period. In other words, monthly revenue budgets allow you to monitor revenues as the year progresses instead of being surprised at the end of the year.

Let’s illustrate the benefits of a church’s revenue budget. A church’s annual revenue budget should be prepared independently of the expense budget. The total of the revenue budget is then compared to the annual expense budget. If the annual revenue budget is less than the annual expense budget, action can be taken to develop additional revenues or to reduce the planned expenses before the accounting year begins.

An additional benefit occurs when the annual revenue budget is also detailed by month.  Let’s assume that the church’s monthly revenue budgets will vary by the number of days of worship in the month, the time of year, and other factors. As a result, an annual budget of $370,000 might consist of the following sequence of  monthly amounts: $26,000 + $28,000 + $35,000 + $30,000 + $30,000 + $32,000 + $27,000 + $28,000 + $30,000 + $28,000 + $30,000 + $46,000. Based on these budgeted or planned monthly revenues, the church is expecting to have revenues of $181,000 for the first six months. If the actual revenues for the first six months are only $173,000 the church officials will see that an $8,000 problem at mid-year needs to be addressed. The shortfall also raises the question of whether there will be a similar shortage in the second half of the year. Thanks to the monthly revenue budget, church officials will be alerted early enough to find a solution. The solution could include a message to members asking for additional contributions, an edict to cut expenses for the remainder of the year, and so on.

Preparing a detailed, realistic budget requires you to plan ahead. This in turn gives you insights prior to the start of the accounting year. Monthly revenue budgets allow you to monitor the receipts right from the beginning of the year.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here