What is the Difference Between a Static Budget and a Flexible Budget?
You might assume you’ll earn $3m each quarter, which changes your annual revenue projection to $12m. For business owners, budgets are valuable planning tools that help you define your financial goals and the path to reaching them. Even if the number of anticipated units to be processed were stated, such as a quantity of 10,000, the budget would remain unchanged if production volume were higher or lower. The lack of detail behind how the numbers are derived often limits the usefulness of the static budget information. This static budget would remain the same throughout Q1 2024, providing a constant point of reference for evaluating the business’s financial performance. Variable costs are expenses that change in proportion to the level of production or sales.
- When compared to the actual results that are received after the fact, the numbers from static budgets are often quite different from the actual results.
- For instance, if the source of your increased costs was unexpected shipping rates, you can either adjust your predictions for next year or look for a cheaper shipping partner.
- That being said, you don’t want to spend all of this money on fixed expenses.
- A static budget is prepared for a period of time based on a fixed amount of activity.
- Once the budget is approved, distribute it to the relevant departments and teams.
- In other words, you can take a favorable variance in one category of your budget, and apply it to another flexible budget variance in hopes of producing more profit.
A static budget serves as a guide or map for the overall direction of the company. Static budgets are the opposite of flexible budgets because they’re fixed. Unfortunately, most businesses can’t accurately forecast their expenses to create a fixed budget that gives them enough wiggle room to spend money on important projects and items like equipment. A static budget stays the same regardless of sales or revenue changes within the company.
By diverting what you would spend on your utilities and in-office expenses to a one-time effort to negotiate a better contract with other suppliers, you’ll end up with more predictable costs in the future. For example, if you build your static budget based on 1,000 units, but only produce or sell 600 units, the static budget is off. The flexible budget allows you to account for that change, accurately reflecting the situation for 600 units. It works the other way, too – if you end up needing to produce 1,400 units, you can use the flexible budget to scale up your total cost. In contrast to a static budget, a company’s sales department might have a flexible budget.
A Business Owner’s Guide to the Static Budget
Static budgets are fixed; they won’t fluctuate with changes to your business sales volume or figures in a given period. Instead, your budget will remain the same whether you earn $500,000 in revenue or $5,000,000 in revenue. Every finance department knows how challenging building a static budget can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
- Variable costs are expenses that change in proportion to the level of production or sales.
- Instead, if you reach your budget and still need to spend more, you’ll have to compromise.
- You’ll need access to financial statements for this project, including the income statement and master budget (if there is one) that holds any historical data (if available).
In other words, the budget is a benchmark for the company’s performance and can help management identify the variances between the plan and the actuals. Often referred to as static planning, it serves as a guide for financial professionals to plan and monitor financial performance during a specific period. Of course, you’ll be subtracting your costs from your expected revenue so that you can estimate future net income.
Pros of a Flexible Budget
Conversely, if revenue didn’t at least meet the targets set in the static budget, or if actual costs exceeded the pre-established limits, the result would lead to lower profits. However, most businesses don’t know how much money they’re going to make from sales. While you can use various sales projection tools, they’re projections, not exact estimates. Therefore, flexible budgets are ideal for most businesses, especially retailers and restaurants. Flexible budgets are inherently more complicated than static budgets because they require more financial oversight and frequent monitoring. Since your budget will change depending on various conditions and factors, it’s crucial to monitor your revenue and expenses regularly throughout your various projects.
In the flexible budget, the sales commissions expense budget would be stated as a percentage of sales. To estimate fixed costs, you’ll need to gather historical data and forecast future expenses. Mosaic’s robust analytic and reporting tools turn business performance data into actionable insights. With real-time data syncs, teams won’t miss an opportunity to identify changes in cash flow, revenue, or any other line item on the budget. If you’re still going through the planning motions to come up with a static budget that doesn’t offer value to the company, it’s time to rethink your process and build more flexible plans. A static budget based on planned outputs and inputs for each of a company’s divisions can help management track revenue, expenses, and cash flow needs.
Cost Center Performance Evaluations
Based on the income statement, the retail store is expected to make a gross profit of $200,000. Let’s assume a retail store wants to create a budget for the next quarter. The budget also includes the assumed cost of achieving a desired outcome, which is relayed as a line item in the budget. Stay ahead of pace by planning and modeling across multiple scenarios and outcomes.
For example, under a static budget, a company would set an anticipated expense, say $30,000 for a marketing campaign, for the duration of the period. However, even if you’re using a fixed budget, you should monitor your financial performance throughout the year to help you make real-time decisions that can affect the health of your business. Static budget variance is the difference between your projected expenses versus actual expenses or adjusted cash book projected revenue versus actual revenue. If your revenue is subject to change, it’s unpredictable, and a fixed budget could leave you with little left to take as profit or allocate to other areas of the business. This type of budget is best suited for nonprofit and government organizations because their revenues and expenses stay the same over time. Any business in any industry can benefit from static budgets throughout its organization.
Understanding a Static Budget
These individuals give themselves a budget for how much they want to spend on renovating a home based on comparable home prices in the neighborhood to ensure they can make a profit. That means, if efforts scale up to $15 million, then the variable portion of the costs of goods sold moves from $3 million to $4.5 million. We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.
Flexible budget use cases
This difference between your static budget and your actual performance is known as a static budget variance. To that end, static budgets lack the functionality required by a growing SaaS startup with the moon in its sights or a mid-growth stage company looking to expand. And as customers respond to rapidly changing market conditions, so must the company’s budget. While flexible budgeting and rolling forecasts enable teams to pivot on a dime, a rolling budget offers another dynamic approach to address changing conditions. Unlike a static budget, a flexible budget changes or fluctuates with changes in sales, production volumes, or business activity.
No matter what budget you choose, you need to have a sound financial foundation. Make your decision carefully and consider the benefits and drawbacks of each for your company or department. As we mentioned before, a budget model choice is highly individualized and doesn’t adhere to the “one size fits all” approach. Static budgets tend to force you into a box – you’re stuck based on a decision that you made at the start of a cycle without knowing definitively what the year ahead might bring. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. None of the busy work – Experience the easiest way to plan your finances with Brixx.
2023-04-27
