Static and Flexible Budgets
Sometimes, things are actually intuitive. That just so happens to be the case here: static and flexible budgets are pretty closely related to what they’re called! In this video we’ll discuss different advantages and disadvantages of both styles. Which budget style you choose for your company or client will largely depend on the nature of that business.
Put simply, a static budget is one where the budget doesn’t change over the given period. Budgets for various departments are set, and then must be adhered to regardless of changing circumstances over the period. The period used doesn’t have to be the fiscal year; it could be a quarter or another determined period of time. A static budget may work well for short periods of time and/or for organizations that work with predictable revenue and expenses.
A flexible budget allows you to set expenditure goals as percentages of revenue. This allows an organization to manage spending based on more recent information, rather than looking at the year ahead and hoping circumstances don’t change much.
Your first step in building a flexible budget is to determine what all of your costs are. Identify those that are fixed and group them together. Then build your budgetary model where fixed costs are established and variable costs are set as a percentage of an activity or of a per-unit cost. Next, enter those activity costs into the model. Finally, compare the model to a completed period to determine how similar they are.
Notice that a flexible budget will still include fixed costs – rent/mortgage, utilities, etc. Very few businesses will have exclusively fixed or entirely variable costs. A variable budget allows you to take all of those costs into account. Another benefit to a flexible budget is the variances you get from the budget to actual are smaller and more significant, since you modulate your budget as you go.
There are a handful of disadvantages to a flexible budget, however:
As we’ve already seen, most costs are not exclusively fixed or variable. Wages may be variable while rent may be fixed, but only within a certain range – if your staff grows or shrinks too much you may need to adjust the size of the office, and the rent will change, not to mention other incidental costs you’ll incur as part of that transition process.
They’re also more difficult to build and take longer to close out.
Finally, you can’t compare budget to revenue, since your budget intentionally tracks your revenue.
Static budgets, on the other hand, are simpler to set up and simpler to use. But that ease of use means that the model is less helpful in certain circumstances.
I hope this short introduction was helpful, and if it was, I’d love it if you’d subscribe and give us a thumbs-up! See you next time.
