Static vs Flexible Budget: What and When to Use

Both static and flexible budgets have their advantages and disadvantages, and you may need to use both depending on your purpose and situation. Generally, you should use a static budget for planning and setting expectations, as it helps you define your goals and static budgets are often used by allocate your resources based on a fixed level of activity or output. You can also use a flexible budget to revise your static budget during the period, if there are significant changes in the business environment that affect your assumptions and projections.

Static budget variance refers to the difference between the budgeted or expected results and the actual ones for a specific period. By comparing actuals to the budget, financial leaders can evaluate the performance of the business and take corrective actions if necessary. So comparing actuals to the budget lets the finance team evaluate the performance of the business and take corrective actions if necessary.

A static budget is a spending plan for your business that covers a defined period of time. It is made up of financial performance projections that don’t change until the budget period ends. Budgeting is an essential skill for any accountant, whether you work for a small business, a large corporation, or a nonprofit organization. Budgets help you plan, control, and evaluate your financial performance and achieve your goals. Depending on your situation, you may need to use a static or a flexible budget, or both.

How static budgets workA static budget is based on a company’s anticipated level of output and revenue at the start of the accounting period it’s designated to cover. Static budgets are typically based on data that is collected and analyzed before the budget period begins. For example, if a company brought in $2 million in revenue last year, it might create a static budget based on the same revenue figure. In Excel, it is easy to build a forecast for the period by taking your expected revenue projections for the period and then applying the fixed and variable expense ratios you calculated.

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. Even if actual sales volume significantly deviates from the static budget, the amounts listed in the budget don’t get adjusted going forward. The static budget remains unchanged regardless of deviations in revenue and expenses that may occur during the period.

  1. So, too, does the cost of production (which includes engineer and customer support).
  2. A static budget model is most useful when a company has highly predictable sales and expenses that are not expected to change much through the budgeting period (such as in a monopoly situation).
  3. If an organization’s actual costs were below the static budget and revenue exceeded expectations, the resulting lift in profit would be a favorable result.
  4. However the most important role of the static budget is that it acts as a good cash management tool.

The static budget is not made to be responsive to favorable and unfavorable variances over the given period. And while you can mitigate this drawback by changing the budget’s time horizon, this is an important limitation regarding the functionality of a fixed budget. A static budget is a great choice for companies that run in stable environments with little fluctuation in revenues and expenses. It’s calculated by comparing the budgeted amounts to the actual amounts for a given period, such as a month or a year.

These variances are much smaller if a flexible budget is used instead, since a flexible budget is adjusted to take account of changes in actual sales volume. Budgets play a key role in helping companies track their finances, analyze their expenses, and identify ways to maximize their profits. A static budget is one that remains constant even as other factors, such as sales volume and revenue, change. A flexible budget, by contrast, is one that adjusts based on changes in revenue or other sales activities. Finance teams can easily identify strengths and weaknesses across the company by reviewing a static budget.

A static budget is a budget that does not change with variations in activity levels. Thus, even if actual sales volume changes significantly from the expectations documented in the static budget, the amounts listed in the budget are not changed. These variances are used to assess whether the differences were favorable (increased profits) or unfavorable (decreased profits).

What is a static budget vs. a flexible budget?

The framework makes it easy to evaluate the performance of different business initiatives and departments. And once variances are identified, finance can go to department and executive leaders to flag any concerns or opportunities to make the budget work even better for the business. During this time, actual results are compared to the budget using variance reports, and finance teams can analyze differences between the two.

A flexible budget is useful for controlling and evaluating your financial performance, as it shows how well you managed your costs and revenues in relation to the actual activity or output. It also allows for a more meaningful analysis of variances, as it isolates the effects of changes in activity or output from the effects of performance. A static budget is a type of budget that incorporates anticipated values about inputs and outputs that are conceived before the period in question begins. A static budget–which is a forecast of revenue and expenses over a specific period–remains unchanged even with increases or decreases in sales and production volumes. However, when compared to the actual results that are received after the fact, the numbers from static budgets can be quite different from the actual results.

A Business Owner’s Guide to the Static Budget

The management might assign a 7% commission for the total sales volume generated. Although with the flexible budget, costs would rise as sales commissions increased, so too would revenue from the additional sales generated. Once a static budget is established, a company will follow it but also keep track of its actual spending, paying close attention to any type of budget variance that pops up.

Drive Business Performance With Datarails

Budget forecast numbers are usually based on past data and assumptions about future performance. The one that’s filled with more office politicking than collaborative, strategic thinking. You know its use cases, how to build one, and what makes it different from a flexible budget. Based on the income statement, the retail store is expected to make a gross profit of $200,000.

How to build a static budget

It also does not allow for easy comparison of actual results with budgeted amounts, as the variances may be due to changes in activity or output rather than performance. A flexible budget is a budget that is adjusted for the actual level of activity or output that occurs during the budget period. It is prepared after the end of the period, using the actual activity or output data and the budgeted amounts per unit of activity or output.

In this case, management wastes time tracking down variances that have no meaning, since the operating environment has changed so much since the budget was enacted. When using a static budget, a company or organization can track where the money is being spent, how much revenue is coming in, and help stay on track with its financial goals. 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.

Variable expenses include items like raw materials, sales commissions, packaging costs, and delivery costs. Your cost of revenue represents your production costs (based on predictable sales). You’ll want to break down your cost of revenue estimates by revenue stream, and you’ll want to differentiate between variable and fixed costs for each. Creating a static budget (or any kind of financial plan) requires a foundation of reliable historical data.