4 Common Pricing Strategies, Which Works Best For Your Business? How you price your products or...
Your annual budget took six weeks to complete last fall. By February, two major customers changed their volume projections. By May, material costs had increased 15%—double what you budgeted. By August, you're managing to a plan that bears little resemblance to current reality.
Sound familiar? This is the classic static budget problem: it's outdated before the ink dries, yet companies spend the entire year comparing actual results to increasingly irrelevant targets.
Rolling forecasts offer an alternative. Instead of budgeting once annually, you continuously update projections, always maintaining a forward-looking horizon that adapts as conditions change. But rolling forecasts require more ongoing effort. They demand discipline. And they challenge traditional budgeting culture.
So which approach works best for manufacturing businesses? The answer depends on your business characteristics, market volatility, and management philosophy. Here's how to decide.
Understanding the Fundamental Difference
Static Budgets
Create once annually, typically covering the upcoming fiscal year. Set targets for revenue, expenses, capital, and cash flow. Compare actual results to budget monthly or quarterly. Variance analysis explains why actuals differ from plan.
Example timeline:
- October-November: Build next year's budget
- December: Finalize and approve
- January-December: Operate to budget, analyze variances
- Repeat
Budget remains fixed regardless of how conditions change. If Q1 revenue is 20% below budget, you still compare Q2-Q4 actuals to the original budget, even though that budget was based on assumptions no longer valid.
Rolling Forecasts
Update continuously (typically monthly or quarterly), always projecting a consistent forward period (usually 12-18 months). As each month or quarter ends, drop the completed period, update remaining periods, and add a new period to maintain the horizon.
Example timeline (12-month rolling):
- January: Forecast January-December
- February: Drop January (actual), update February-December, add next January
- March: Drop February, update March-December + January, add next February
- Continue monthly
Forecast adapts to changing conditions. If Q1 revenue is 20% below projection, you update Q2-Q4 forecasts to reflect new reality rather than comparing to stale assumptions.
Understanding how to build a rolling forecast that actually works provides the foundation for this comparison.
Static Budget Advantages
Static budgets dominate manufacturing for good reasons:
Clear Annual Targets
Static budgets set annual goals: "Revenue $15M, operating margin 18%, CapEx $2M." These targets align the organization, drive accountability, and provide clear success measures.
Rolling forecasts, by definition, continuously change. While they provide better projections, they offer less clear annual accountability. "Our Q4 forecast is now $14.2M" doesn't have the same goal-setting power as "Our annual budget is $15M."
Simpler Administration
Build once, use all year. Managers submit budget requests in fall, finance consolidates, leadership approves, done. Minimal ongoing work required until next year.
Rolling forecasts require monthly or quarterly updates. Every period, review assumptions, update projections, communicate changes. More administratively intensive.
Easier Performance Evaluation
Performance reviews use budget vs. actual. "You achieved 103% of budget revenue" is straightforward. Everyone understands budget targets from day one.
Rolling forecasts create moving targets. Evaluating performance requires more nuance: "You achieved 98% of initial projection but 105% of updated forecast—how do we evaluate this?"
Familiar Process
Everyone understands annual budgets. New managers know the drill. Board members expect it. Bankers and investors work with annual plans.
Rolling forecasts are less familiar. Require change management, training, and cultural adaptation. Resistance is common.
Good for Stable Environments
If your business operates in a relatively predictable environment—stable customer base, mature products, gradual market evolution—static budgets work reasonably well. Annual planning frequency matches pace of change.
Static Budget Limitations
The same characteristics that make static budgets simple also create significant limitations:
Obsolescence Problem
The world changes faster than annual planning cycles. Customer demand shifts. Competitors act. Costs move. Regulations change. Technology disrupts. Yet your budget remains frozen.
By midyear, you're often managing to a plan disconnected from reality. Variance analysis explains why you missed outdated targets rather than helping you navigate current conditions.
Backward Looking Focus
Static budgets drive attention to past variances rather than future opportunities and risks. Monthly reviews dissect why last month missed budget instead of discussing what's coming and how to respond.
This rearview-mirror focus delays adaptation. Problems are recognized in variance reports after they've occurred rather than anticipated in forward projections.
Gaming and Sandbagging
When compensation and performance reviews tie to budget achievement, people game the system. Sales sandbags revenue targets. Operations inflates cost budgets. Everyone builds cushion.
The result: budgets that don't reflect true capability or stretch goals but rather negotiated numbers everyone can safely beat.
Rigidity
Static budgets create "use it or lose it" dynamics. Departments rush to spend budget by year-end, fearing next year's budget will be lower if they underspend. Strategic opportunities that arise mid-year struggle to get funding because "it's not in the budget."
Understanding dynamic budgeting approaches reveals how to maintain flexibility.
Rolling Forecast Advantages
Rolling forecasts address static budget limitations:
Always Current
Rolling forecasts reflect reality, not outdated assumptions. Update monthly or quarterly with latest information: current backlog, recent wins/losses, cost trends, capacity utilization.
Decision-makers work with projections that actually reflect current conditions and informed expectations, not stale annual targets.
Forward Looking
Rolling forecasts maintain constant forward horizon. Always looking 12-18 months ahead means you see capacity constraints, cash needs, and resource requirements with adequate lead time.
Static budgets lose forward visibility as the year progresses. By Q4, you're only projecting 3 months ahead. Rolling forecasts always maintain longer perspective.
Enables Better Decisions
Current, forward-looking forecasts support better decisions. Should we accept this large order? Can we afford to hire? Do we need additional financing? Rolling forecasts answer these questions with relevant projections.
Static budgets answer these questions with increasingly irrelevant targets that may no longer reflect business trajectory.
Reduces Gaming
When forecasts update regularly, less incentive to sandbag. You can't hide behind conservative assumptions that won't be updated for 12 months. Regular updates expose unrealistic projections quickly.
Adapts to Change
Rolling forecasts are built for volatility. Market shifts? Update the forecast. New competitor? Adjust projections. Cost spike? Reflect it immediately. The forecast evolves as business reality evolves.
Understanding manufacturing rolling forecasting techniques shows specific methods for manufacturers.
Rolling Forecast Limitations
Rolling forecasts aren't perfect either:
More Resource Intensive
Monthly or quarterly forecast updates require ongoing effort. Finance teams update models. Department heads provide input. Leadership reviews and approves. This continuous cycle consumes more time than annual budgeting.
Moving Target Problem
"What's our annual revenue target?" becomes harder to answer. Initial projection? Latest forecast? Average of all forecasts? This ambiguity complicates goal-setting and accountability.
Requires Cultural Shift
Organizations accustomed to annual budgets resist rolling forecasts. "Why are we updating again? We just did this last quarter!" Finance becomes seen as constantly asking for updates rather than annual event everyone tolerates.
Needs Discipline
Rolling forecasts only work with consistent execution. Skip a few months and they become stale. Updating becomes "when we get around to it" rather than systematic discipline.
Without commitment, rolling forecasts devolve into annually-updated static budgets with extra steps.
Hybrid Approach: Best of Both Worlds
Many manufacturers find a hybrid approach works best:
Annual Budget + Quarterly Rolling Forecast
Annual budget sets targets, allocates strategic resources, drives accountability Quarterly rolling forecast maintains current projections for decision-making
Example:
- October: Set annual budget ($15M revenue, 18% operating margin)
- January: Q1 complete. Update 12-month rolling forecast (now $14.5M projected)
- April: Q2 complete. Update rolling forecast (now $14.2M projected)
- July: Q3 complete. Update rolling forecast (now $14.8M projected)
Annual budget remains the accountability target. Rolling forecast provides decision-making projections that reflect current reality.
Annual Strategic Budget + Monthly Operational Forecast
Annual strategic budget covers major strategic decisions (headcount plans, capital investments, market entries) Monthly operational forecast covers tactical decisions (hiring timing, inventory levels, cash management)
Strategic decisions don't need monthly updates. Operational decisions do. This approach focuses monthly effort where it adds most value.
Understanding how CFOs use forecasting to guide decision-making shows how both tools serve different purposes.
Decision Framework: Which Approach for Your Business?
Choose Static Budget If:
Your business is relatively stable
- Mature products with predictable demand
- Long-term customer relationships with stable volumes
- Gradual market evolution
- Predictable cost environment
You have limited finance resources
- Small finance team
- No dedicated FP&A function
- Limited systems and technology
- Manager bandwidth constraints
Annual planning frequency matches change pace
- Strategic decisions made annually
- Budget drives annual resource allocation effectively
- Market changes aren't time-sensitive
Choose Rolling Forecast If:
Your business faces significant volatility
- Customer volumes fluctuate substantially
- New product introductions
- Competitive dynamics shifting rapidly
- Material costs or other inputs highly variable
You need better decision-making tools
- Frequent resource allocation decisions
- Growth requiring ongoing capacity/capital decisions
- Cash flow volatility requiring proactive management
You have finance capability
- Strong finance team or CFO support
- Systems that enable efficient forecast updates
- Management team comfortable with continuous planning
Choose Hybrid Approach If:
You want accountability AND adaptability
- Need clear annual targets for performance management
- But also need current projections for decisions
You have mixed volatility
- Some parts of business stable (strategic planning)
- Other parts volatile (operational planning)
You're transitioning
- Moving from static to rolling but not ready to abandon budgets
- Building capability progressively
Understanding aligning budgets with strategic goals helps integrate either approach with strategy.
Implementation Best Practices
For Static Budgets:
- Use scenario planning (base, optimistic, conservative)
- Quarterly re-forecasts even with static budget
- Variance analysis with action plans, not just explanations
- Reserve 5-10% for mid-year strategic opportunities
For Rolling Forecasts:
- Start simple (12-month horizon, quarterly updates, key drivers)
- Clear ownership for each component
- Standardized templates for efficiency
- Link explicitly to specific decisions
- Communicate updates and implications regularly
For Hybrid Approaches:
- Clarify purpose (budget = targets, forecast = projections)
- Avoid confusion about what changes and what doesn't
- Actually use rolling forecasts for decisions
- Keep models manageable
Working with a fractional CFO helps implement either approach effectively.
Common Mistakes
Doing both poorly: Half-hearted rolling forecasts plus detailed budgets creates double work without benefits
Starting too complex: Elaborate models taking weeks to update won't be maintained
No decision link: Forecasts not informing actual decisions are wasted effort
Abandoning budgets too fast: Organizations need adaptation time. Hybrid often works better than abrupt transitions
Expecting perfection: Neither produces perfect projections. Both improve decisions when executed reasonably well
The Bottom Line
Rolling forecasts vs. static budgets isn't right vs. wrong—it's fit for purpose. Static budgets excel at setting clear targets and driving accountability in stable environments. Rolling forecasts excel at maintaining current projections and enabling adaptation in volatile environments.
For many manufacturers, hybrid approaches work best: annual budgets for strategic planning and accountability, combined with rolling forecasts for operational decision-making and adaptation.
The right answer depends on your specific circumstances:
- How volatile is your business environment?
- How frequently do you make resource allocation decisions?
- What finance capabilities do you have?
- How does your culture respond to continuous planning?
Start with honest assessment of these factors. Then choose the approach—or combination—that fits your needs. And remember: executing either approach reasonably well beats perfect design that's never consistently implemented.
The goal isn't picking the theoretically superior method. It's selecting the approach you'll actually use to make better decisions, allocate resources more effectively, and adapt to changing conditions successfully.
