What is the difference between a static and flexible budget, and when should you use each? (2024)

Static and flexible budgets are two different approaches to financial planning and analysis. A static budget remains fixed throughout a financial period, while a flexible budget adjusts based on actual performance. Static budgets work well when costs are stable and predictable, whereas flexible budgets are suited for industries or expenses subject to fluctuations and variations. You should use a static budget when you have confidence in your estimates and expect little change. A flexible budget is appropriate when you anticipate significant variations due to changing levels of activity or production. Often, a combination of both approaches is used to adapt to changing conditions during a financial period.

there are two main types of budgets in business - static and flexible. A static budget is set at the beginning and does not change; it’s like a plan that stays the same no matter what happens. Businesses use it to compare planned spending with what they actually spent. A flexible budget is more adaptable; it changes based on what’s actually happening in the business. This is handy for dealing with costs that can go up or down. Often, companies use both kinds of budgets. The static one helps keep track of planned versus actual spending, and the flexible one helps adjust the plan as things change. Together, they make managing money easier for a business.

There is not a lot of flexibility with a Static budget which can be OK if you are in an industry and an economy with static growth.Personally I've leaned towards the Flexible Budget, you can adjust Labor and Other Expenses based on Growth/down turn patterns and the swings in the Economy caused Climate or Political outcomes.Tornadao's, fires, hurricanes on the Climate side, Pandemic shutdowns, or stunting growth in specific industries for political agenda's.Keeping your Eye on current events & how it will benefit or effect your Company 12 months down the road will be the difference in sucess or just survival!Be Flexible and adjust !

- A static budget, also known as a fixed budget, is a budget that remains unchanged regardless of actual performance. It is prepared based on a single set of assumptions or estimates at the beginning of the budgeting period and remains fixed throughout that period. - A flexible budget, also known as a variable budget, is a budget that adjusts based on changes in activity or volume levels. It is designed to reflect different levels of performance, and the budgeted figures change as activity levels change.

A static budget is a snapshot of your plan for the next year BASED ON DATA AVAILABLE at the present time. Our company used this for presentations at or near year-end. Then, during the year, we used a rolling (flexible) budget updated monthly for each business based on the NEW current information. This was labor intensive, but a useful tool for planning going forward. We had more than 800+ individual businesses that needed to be rolled up each month, so this was invaluable.

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Static budgets are suitable when businesses expect consistent performance, and deviations from the budget are minimal. They serve as a baseline for financial planning and performance evaluation. And flexible budgets are preferable when performance fluctuations are expected and adjustments are necessary; or to analyze variations between planned and actual results effectively. They provide a more realistic financial picture and are valuable for decision-making and controlling costs.The choice between static and flexible budgets depends on the stability of your business environment and your need for accurate, adaptable financial planning and analysis.RespectfullyAbdel Latif DAFFE, Chartered Accountant & FMVA® | West & Central Africa

It is the result that modifies or compliments changes in size. The budget is more risky and beneficial than the fixed budget (fixed budget), which states its amount regardless of the size of the activity. For example, you wouldn't believe a manufacturer signing up that the cost of electricity and supplies for the plant is about $10 per hour. She also knows that the famous actor in the factory, depreciation, and other phone costs are about $40,000 per month. Firstly, it works to produce between 4,000 and 70,009 hours per month. Based on this information, the flexible budget for each month would be $40,000 plus $10 per hour of electricity supply to the plant.

Static Budget used when your business operates in a stable environment with minimal changes in activity levels. It is suitable for long-term strategic planning and initial budgeting, as benchmark for annual performance evaluation.Flexible Budget used when your business experiences fluctuations in activity levels or when you want to assess performance under different scenarios. It is valuable for short-term decision-making, allowing you to adjust the budget to reflect changing conditions.In practice, many organizations use a combination of both static and flexible budgets. By creating a static budget as a baseline for the fiscal year and then use a flexible budget to adapt to changes in business volume or other variables as they occur.

- Static budgets are most suitable for businesses with stable and predictable operating environments. They are less adaptable to significant changes in revenue or expenses.- Flexible budgets are particularly useful for businesses with variable revenues and expenses. They are adaptable and can provide a more realistic picture of financial performance in changing conditions.

Preparing a fix budget is pretty easy and basic as you don't need to modify it. Flexible budget on the other hand requires financial modeling with adjustable variables that you can play with and adjust. A good financial model is essential to build an effective flexible budget.

To analyze a static budget, you can: Identify the fixed and variable expenses within the company's operationsAccount for all expensesEstimate the variable costs using budget forecasting techniquesCompare the budget to actual financial resultsTo analyze a flexible budget, you can: Identify the various costs and expenses that vary with changesClassify the expenses into separate categories of variable costs, semi-variable costs, and fixed costsCompare the budget to actual resultsIdentify and analyze the variances that affect performance and profitabilityStatic budgets are more important for process innovation, while flexible budgets are more important for product innovation.

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Apart from all the definitions of both type of budgets, stability in macro economics is a key elements in opting static vs flexible bidgets