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Static Budget

Updated on January 5, 2024
Article byPranjal Jain
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is 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.

Static Budget

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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.

Key Takeaways

  • 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 Explained

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 companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more, 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 periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more.

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Examples

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.

Static Budget

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.

Importance

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 flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more 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.

Advantages & Disadvantages

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

Static Budget vs. Flexible Budget

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.

Frequently Asked Questions (FAQs)

What is the use of a static budget?

An organization’s outputs and inputs are planned out in a static budget to help management track cash flows, profits, and spending and help the firm achieve its goals most effectively.

What is the difference between static and flexible budgets?

A flexible budget is a cost analysis technique that adapts to a company’s sales and production volume variations. In a static budget, every revenue and spending for a given time is anticipated in advance.

What are the limitations of a static budget?

The flexibility is the biggest drawback. For example, consider a situation where a company bases its budget on a specific amount of sales and particular circumstances and the level of sales changes for whatever reason.

Recommended Articles

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