Static Budget

A static budget can be defined as the kind of budget that anticipates all revenue and expenses over a particular period in advance. Here changes in the level of production/ sales or any other major factor do not affect the budgeted data, and hence it is also called a fixed budget.

Accordingly, an organization can keep track of its expenses and ensure whether it is going on as per plan. The static budget becomes dysfunctional in case of a change in anticipated situations like a significant change in actual production/ sales. Overall, it is a very beneficial tool for every organization for product profitability and cost analysis.

• A static budget foresees all income and outlays in advance for a specific period.
• In a static budget, all numbers for inputs and outputs for the given time are predetermined. According to changes in predicted circumstances, actual amounts may accrue according to the budget or differ significantly.
• Every firm stakeholder can benefit from using it. CFOs and accountants may use it to guarantee financial controls. It prevents overspending and balances the company's incoming earnings and outgoing expenses.
• The corporation cannot raise or decrease funding to improve utilization in areas where it discovers underperformance. It will reduce business profitability.

Static budget report figures are all predetermined concerning inputs and outputs for the specified period. It can be described as the prediction of income and expenses for the time being, which is not affected by an increase or decrease in sales or production levels. Actual figures can accrue in line with the budget or vary widely depending on changes in anticipated situations.

It remains fixed for the duration covered. To analyze different reasons, organizations prepare a flexible budget keeping in line with the current scenario. Finance professionals and management teams use it to fix target revenue and related expenses, costs, etc.

All business organizations commonly use this type of budget. Like the public, private companies, non-government organizations, educational institutions, and non-profit organizations due to limited available funds for the given period.

Therefore, one can describe a static budget as the basic outline or blueprint of a series of activities that an organization will carry out along with its financial figures, usually prepared at the initiation of either a new business plan or a new accounting period.

Let us understand the crux of static budget accounting and its impact through the examples below.

Example #1

Marc Inc. is in the process of establishing a new manufacturing unit in the US. The company is planning to avail a loan from US Bank of $10,00,000. For this purpose, the company wishes to prepare a static budget with the following available data: –

1. Sales 1,00,000 units @ $14 each;
2. Prime manufacturing cost @ $4 per unit;
3. Overheads @ $4,00,000;
4. Sales Variable expense @ 2 units;

The budget will be as follows: –

This budget will remain static despite the change in quantity produced/ sold.

Example #2

Global tech companies grew at exponential rates even through a pandemic in 2020. However, late in 2022 and early in 2023, the global recession round the corner, they had started curbing their budget and spent their resources in places only where it was absolutely necessary.

As an unfortunate result, Amazon had to lay off 18,000 employees, meta laid off 11,000 employees. In total over 170,000 individuals lost their jobs in this window as their employers had to stick to a stricter and more inflexible budget to fend off the threat of a recession affecting the existence of their businesses.

Let us understand the importance of a static budget report through the discussion below:

• A static budget is the planning of outputs and inputs of a company department which helps the business management monitor cash flows, income, and expenses, thereby assisting the organization in attaining maximum results in the best possible manner.
• By maintaining such a budget, the financial requirements of each department company can monitor day-to-day work as well as long-term financial plans. It is a blueprint or guiding scale of a business organization for a particular period.
• It is a useful tool for every stakeholder within the company. Accountants and CFO can use it to ensure monetary controls. It saves the organization from overspending and balances outgoing payments and incoming revenues, i.e., it controls the flow of funds as per planning.
• It can also be termed a cash flow planning tool for the organization. Suppose a company has a well-maintained cash flow system. In that case, it will never fall short of cash in any situation arising out of any contingency like the breakdown of equipment or more production requirements, etc.
• It is an essential tool by which a company can monitor fund flows. I.e., where the money is coming from within the organization and whether it is in line with initial planning? Also, it helps the company to track expenses, i.e., whether the money is expended following predefined limits and timing sets.

Static budget accounting and its implementations have their own set of advantages and disadvantages. Let us get to know them through the discussion below:

Advantages

• It provides the blueprint of organization activities, which will be performed over time. Knowing in advance what the organization needs to do will always be beneficial for it to perform various activities efficiently.
• It does not need continuous updates throughout the year with any increase or decrease in sales or production level, so they are straightforward to implement and follow.
• Moreover, It provides a more in-depth knowledge of its profits and costs. An organization can change its policies and strategies for the future. This budget allows the company to track underestimating/ overestimating its income and expenses.
• Static budgets don’t allow any change if figures by any change in company production, so these companies can lower costs by making smarter decisions.

Disadvantages

• The most significant disadvantage is flexibility. Suppose an organization plans a budget on a certain level of sales and conditions, and the level of sales increases/ decreases due to any reason. In that case, the static budget cannot allocate additional sales and costs incurred in the existing budget.
• The company can’t increase or decrease funds in areas where it finds under-performance to make better utilization. It will harm companies’ profits. It works on data from the previous cycle, but it is challenging for new business organizations to work on such budgets and apply.
• This budget is useful in a business where sales and expenses are highly predictable. In contrast, when companies see changes in sales and production levels from time to time, they can’t use a static budget. This budget cannot act as a tool for cost and benefit analysis. It will always be used in concurrence with a flexible budget to analyze the area for improvements.

Let us understand the difference between the two of the most discussed types of budgets through the comparison below. It shall help us understand a static budget report better in the process.

• A flexible budget is a form of costing analysis tool which changes with the change (increases or decreases) in sales and production level of business. Flexible budgets are fundamental tools to measure business performance on a static budget.
• The flexible budget helps ensure whether fund flows/ income expenses are in line with static budget anticipations, thereby enabling the business owner to monitor business efficiency. As flexible budgets are business performance analysis tools, you can use them either during the planned period or at the end of the business cycle.
• With the help of flexible budgets, the business management can adjust the next year’s static budget accordingly to manage the operating/ administrative/ selling or any other expenses. You can use a flexible budget to meet any unforeseen situation like the requirement of more supplies in case of increased production due to an increase in demand. Or in case the company needs more employees for overtime in times of increased production and planning for product pricing, product costing, etc.

This article has guided to what is Static Budget. Here we explain its examples, compared it with flexible budget, and discussed its advantages & disadvantages. You may learn more about financing from the following articles –

• Budget Report
• Advertising Budget
• Budget Analyst
• Overhead Budget