Budgets help keep you on track financially if used properly. When you set up a budget, you can choose between the two main budget types -- flexible and static. Although most individuals and businesses use a flexible budget at some point, static budgets have notable benefits. In some circumstances, they are the better budget choice.
Static Budget Defined
A static budget is a budget in which allotments do not change over the course of a budget period. It does not take changes in expenses or income into account. Even though a static budget doesn't change, like a flexible budget, static budgets may cover many different areas, such as utilities, rent or food.
Ease of Planning
With a static budget, the numbers with which you work are constant. This can make it easy to plan and investigate financial options. For example, with a flexible budget, you may have $50 for entertainment one month and $75 the next. Under this method, you can't really tell what you'll be able to afford from one month to the next. With a static budget, you always know there is $50 for entertainment. This makes it easy to predict what you can do.
Visibility of Variances
Static budgets don't accommodate fluctuations in costs or revenue. Some consider this blindness to current markets as a limitation in static budgets, since your actual income and expenditures often vary from your budget projections. However, because static budget variances force you to be aware of where your budget was inaccurate, they let you easily monitor market trends. Over time, if you review the trends, you can make predictions about what may happen in the future and make the budget for the next static budget cycle more accurate.
With a flexible budget, you constantly have to reassess and come up with additional or new figures. With a static budget, this really isn't necessary. You may end up spending less time working on the budget.
Some experts such as Jerry J. Weygandt, Paul D. Kimmel and Donald E. Kieso propose that there really isn't a lot of difference between a static budget and a flexible budget. In their book, "Managerial Accounting: Tools for Business Decision Making," Weygandt, Kimmel and Kieso see flexible budgets as merely a chain of static budgets. In this sense, flexible and static budgets are connected, and despite the limitations of a static budget, you should see a static budget as a foundation for flexible methods.
Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.