A static annual budget prepared once at the start of the financial year is not a useful management tool for a South African SME. In fact, not having one is just as unhelpful. Twelve months of trading brings changes that no budget prepared in February could fully anticipate: shifts in client mix, changes in cost structure, unexpected opportunities and unexpected challenges.
A static budget becomes increasingly disconnected from reality as the year progresses. By month eight or nine, if not sooner, it often bears little resemblance to the actual financial environment of the business. Comparing actuals to a budget that is eight months out of date produces variances that reflect forecast error more than business performance.
A rolling budget solves this problem. It is a budget that is updated monthly, maintaining a fixed forward horizon. Instead of budgeting once for the full year and watching it age, you extend the budget by one month at the end of each month, incorporating what you have learned in the period just completed.
How a rolling budget works
At the start of the year, you budget for months 1 through 12. At the end of month 1, instead of simply moving into month 2 of the existing budget, you add a new month 13 to the end, informed by what actually happened in month 1. The result is that you always have 12 months of budget ahead of you. The budget is never more than one month old for any given period. Assumptions that proved wrong in month 1 are corrected before they compound through the rest of the year.
A rolling budget is not more work than a static budget. It is a different distribution of the same work. Instead of one large annual exercise, you do one small monthly update. The result is a budget that remains useful throughout the year rather than becoming irrelevant after the first quarter.
What to update each month
| What to update | Why it matters |
| Revenue forecast for the new month | Informed by current pipeline, recent client wins or losses and any known changes to retainer values or project scope. |
| Payroll costs | If a hire happened or is about to happen, update the payroll line from the relevant month forward at the full cost. IF a staff member leaves and is not replaced, a decrease will appear. |
| Costs that have changed materially | Supplier price increases, load shedding-related costs, new subscriptions. Update relevant months with the new run rate. |
| Variance analysis from the closing month | Understanding why actuals differed from budget improves the accuracy of forward estimates month by month. |
| The new 13th month | Add a forecast for the new month at the end based on current trajectory, known commitments and variance learnings. |
Rolling budget versus rolling forecast
A rolling budget sets targets and is used for performance evaluation against plan. A rolling forecast describes what you believe will actually happen, without the normative element of a target. Both are useful and serve different purposes.
For most South African SMEs, a rolling budget is sufficient at the management accounts level. Your 13-week cash flow forecast and your rolling budget operate on different time horizons and complement each other. The cash flow forecast tells you about liquidity week by week. The rolling budget tells you about profitability month by month over the next 12 months.
Load your rolling budget into Xero using the Budget Manager under Accounting, then Advanced. Update it monthly alongside your management accounts review. After one quarter of maintaining it consistently, it becomes one of the most useful management instruments in your business.
12 months may sound too far ahead and I have said before that 90 days is about the maximum you should go to. This still holds true for tangible cash flow and budgeting. A rolling budget builds on the month just past and adds it onto the next year. You can mirror the successes or failures in the same month next year by doing this immediately.
All businesses have cycles and you can see this as you go through the year.
Picture this situation:
Having seen 2 months of the year in August and September last year, Henry decided to do a marketing campaign in June and July the following year. The aim was to make August and September better than last year. While June and July were tighter because of the expenses of the campaign, August showed a slight increase from last year while September showed a marked increase. Seeing this, Henry entered the data from this year into his rolling budget for next year. You can guess what happened!
Want to implement a rolling budget in Xero connected to your monthly management accounts? Book a free discovery call with Bruce.
About the author
Bruce is the founder of BC Accounting Services (BCAS), a Xero Partner and Certified Adviser based in South Africa. He works with SME owners and growing businesses to build financial clarity, strategic direction and measurable performance through the PCP Method: Purpose, Clarity, Performance.
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