Learning Objective 3 Prepare the operating budget and its supporting schedules
Budgets are typically developed for a set period, such as a month, quarter, or year, which can be then broken into subperiods. For example, a 12-month cash budget may be broken into 12 monthly periods so that cash inflows and outflows can be better coordinated.
The motive for creating a budget should guide a manager in choosing the period for the budget. For example, consider budgeting for a new Harley-Davidson 500-cc motorcycle. If the purpose is to budget for the total profitability of this new model, a 5-year period (or more) may be necessary to cover the product from design to manufacturing, sales, and after-sales support. In contrast, for a seasonal theater production, a 6-month cash budget from the planning stage to the final performance should suffice.
Managers frequently use a 1-year budget period, subdivided into quarters and months. They revise and update the budget during the year. For example, at the end of the second quarter, management may change the budget for the next two quarters in light of new information obtained during the first 6 months.
Some companies use rolling budgets. A rolling budget, also called a continuous budget or rolling forecast, is a budget that is always available for a specified future period. It is created by continually adding a month, quarter, or year to the period that just ended. Consider Electrolux, a global appliance company, which has a 3- to 5-year strategic plan and a 4-quarter rolling budget. A 4-quarter rolling budget for the April 2019 to March 2020 period is superseded in the next quarter—that is, in June 2019—by a 4-quarter rolling budget for July 2019 to June 2020, and so on. There is always a 12-month budget (for the next year) in place. Rolling budgets constantly force Electrolux’s management to think dynamically about the forthcoming 12 months, regardless of the quarter at hand. The disadvantage is the time it takes to prepare fresh forecasts. Some companies, such as Borealis, Europe’s leading polyolefin plastics manufacturer, and Nordea, the largest financial services group in the Nordic and Baltic Sea region, prepare rolling financial forecasts that look ahead five quarters.