Budget planning is an absolute necessity for successful investors. Creating a budget helps increase focus on targets, goals and strategic plans. Budgets also function as useful assessment tools. Comparing input to its output easily assesses performance levels. There are two types of budget planning: static and flexible. Analyzing each method, along with your own goals, helps determine which strategy to use.
Investors using the static budget method create the budget before the anticipated budget period. This financial plan remains constant throughout the period regardless of changes in activity. For example, if the period's overhead is less than the amount quoted in the budget, the budget does not change. Static budgets allow investors to analyze any divergence between the forecasted budget and actual expenditures; a situation known as the static budget variance.
Flexible budgets account for changes in an investor's revenue with regard to expenses. This method calculates the budget based on a percentage of revenue rather than fixed numbers, permitting the investor an unlimited amount of changes to the budget, depending on actual income levels. When using a flexible budget, investors evaluate the proposed budget at the end of a pre-determined period. Inputting new figures changes the budget of future months, or periods, to reflect real numbers.
Static budgets are relatively simple to develop and implement and allow the company to assess singular instances of expense during a specified period. This method creates stability for those in charge of allocating funds since extra revenue or expense does not change the budget. Flexible budgets reorganize fund allocations based on present circumstances, giving planners more control during the budget period. Evaluating profits becomes simpler using a flexible budget because it utilizes more points of change and analysts can use shorter timelines.
Using a static budget allows for inaccurate analysis of budget variances; if there are significant changes or if the budget period is far into the future, it is difficult to develop accurate or useful predictions. Another issue with static budgets is the failure to account for circumstances outside the investor’s control. Should something arise that the budget doesn't account for, it is unprepared to resolve the problem. Flexible budgets are time consuming and because of constant change, become difficult to maintain. Depending on the amount of change during the budget period, analyzing and drawing conclusions using the flexible method can be difficult.
- Oregon State University; Management Accounting Concepts & Techniques¬: Microeconomic Foundations of Management Accounting; Dennis Caplan
- Seattle Central Community College: Flexible Budgets and Standard Costing
- Edward Lowe Foundation; Second-Stage Entrepreneurs: How to Create A Budget; Craig A Shutt, 2001
- Accounting Tools; What is a Flexible Budget?; December 2010
- Accounting Tools; What is a Static Budget?; December 2010
- Principles of Accounting; Chapter 21, Budgeting: Planning for Success; 2010