What is continuous budgeting?
Continuous budgeting is the process of continually adding one more month to the end of a multi-period budget as each month goes by. This approach has the advantage of having someone constantly attend to the budget model and revise budget assumptions for the last incremental period of the budget. The downside of this approach is that it may not yield a budget that is more achievable than the traditional static budget. since the budget periods prior to the incremental month just added are not revised.
The continuous budgeting concept is usually applied to a twelve-month budget, so there is always a full year budget in place. However, the period of this budget may not correspond to a company's fiscal year.
If a company elects to use continuous budgeting for a smaller time period, such as three months, its ability to create a high-quality budget is greatly enhanced. Sales forecasts tend to be much more accurate over periods of just a few months, so
the budget can be revised based on very likely estimates of company activity. Over such a short period of time, a continuous budget is essentially the same as a short-term forecast, except that a forecast tends to produce more aggregated revenue and expense numbers.
Continuous budgeting calls for considerably more management attention than is the case when a company produces a one-year static budget, since some budgeting activities must now be repeated every month. In addition, if a company uses participative budgeting to create its budgets on a continuous basis, then the total employee time used over the course of a year is substantial. Consequently, it is best to adopt a leaner approach to continuous budgeting, with fewer people involved in the process.
If continuous budgeting principles are applied to capital budgeting, this means that funds may be granted for large fixed asset projects at any time, rather than during the more typical once-a-year capital budgeting process that is prevalent under more traditional budgeting systems.