A common way to set up a flexible budget, for example, is to budget for variable expenses based on level of output. It forces you to think about what expenses you expect to incur (both variable expenses and fixed expenses) and how much revenue your business needs to generate to reach your goals. A budget helps create a roadmap for where you want your business to go. If one’s monthly expenses typically consume the lion’s share of net income, any budget should focus on identifying and classifying all the expenses that occur during the month, quarter, and year. And for people whose cash flow is tight, it can be crucial for identifying expenses that could be reduced or cut, and minimizing any wasteful interest being paid on credit cards or other debt.
Expect to see it in Sections A or B, and there is a fair chance of it appearing in Section C, so you need to be ready to handle 20-mark questions from both a numerical and a discussion-based perspective. This series of articles will cover the budgeting approaches flexible budgeting, activity-based budgeting, rolling budgeting, zero-based budgeting, and beyond budgeting. Flexible means easily adjustable, and Budget refers to an anticipated plan made for the financial activities of the entity. Therefore, the flexible budget is a financial plan created for different activity levels. It can be freely adjusted or re-casted on the basis of output produced. It is logical and practical because the cost can be easily determined at various activity levels.
A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations. So in conclusion, both types of budgets have their pros and cons, so it’s important to weigh them carefully before deciding which one is right for you. As previously indicated, both budget categories are significant in particular contexts.
Head To Head Comparison Between Fixed Budget vs Flexible Budget (Infographics)
Here are some of the best accounting software programs you can consider. Again, if you don’t have any kind of budget for your small business, then your first goal should simply be to create one. Those killer interest rates on your credit cards aren’t fixed in stone, for example. Call the card company and ask for a reduction in the annual percentage rates (APR).
- These kinds of payments can be the same each month for the entire period of time in which you’re obligated to pay them.
- A budget that does not take into account any circumstances resulting in the actual levels of activity achieved being different from those on which the original budget was based.
- It is your budget, after all—just make sure you keep your long-term financial goals in the picture.
- • As said earlier, a fixed budget is based on previous data so new businesses may face problems while implementing and fixing the budget.
Flexible or variable budgets, on the other hand, change from time to time based on changes in expenditures. The benefits to a fixed budget include greater stability, better savings, and easier future planning, while the disadvantages include reduced flexibility. A budget that does not take into account any circumstances resulting in the actual levels of activity achieved being different from those on which the original budget was based. Consequently, in a fixed budget the budget cost allowances for each cost item are not changed for the variable items. When considering the differences between a fixed budget and a flexible budget, it is important to remember your personal financial situation.
Fixed Expenses Definition
Many people find that just by looking at aggregate figures for discretionary expenses, they are spurred to change their patterns and reduce excessive spending. In general, traditional budgeting starts with tracking expenses, eliminating debt, and once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund. This emergency fund acts as a buffer as the rest of the budget is put in place and should replace the use of credit cards for emergency situations. The dollar amounts listed on a flexible budget change based on sales levels, production levels, or other external economic factors.
If you budget by paycheck or schedule automatic bill payments, having bills due at roughly the same time can help with avoiding late payments and the fees that go along with them. Typically, most agencies and companies plan their proposals way ahead. So managers can set the fixed budget considering the previous year’s data. It also aids in planning your budget as per your company goals and needs. Thus, you can make smart decisions while spending (or) during a crisis.
Disadvantages of Fixed Budgets
There tend to be much smaller variances from the budget when a flexible budget is used, since the model tracks much closer to actual results. The term budget refers to an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for any entity that wants to spend money, including governments and businesses, along with people and households at any income level. Do you feel like you’re getting a less-than-ideal return on investment from your budgeting? In this article, I will walk you through the difference between fixed budget and flexible budget. Fixed budget and flexible budget are two different types of budgets.
Remove the Options That Allow You to Cheat on Your Budget
A fixed budget is set based on a specific, predetermined amount of income. A fixed budget is a financial plan that is not modified for variations in actual activity. It is the most commonly-used type of budget, because it is easier to construct than a flexible budget.
While fixed budget operates in only production level and under only one set of condition, flexible budget comprises of several budgets and works in different conditions. This type of budget is the easiest to create, since your numbers are fixed. But if actual activity changes in key categories (such as fixed costs, variable costs, or production volume), you may quickly deviate from the budget and it may feel like a wasted effort. Finding the favorable or unfavorable variances between the actual and budgeted performance is one way that management can gauge the performance of a segment. This is why flexible or variable budgets are usually preferred to static budgets.
Pros and Cons of Flexible Budgets
The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. If you’re still not convinced that budgeting is for you, here’s a way to protect yourself from your own spending habits. Set up an automatic transfer from your checking account convention of conservatism to a savings account you won’t see (i.e., at a different bank), scheduled to happen right after you get paid. If you don’t have any major savings goals (upsizing your living situation, starting your own business, etc.), it’s hard to drum up the motivation to stash away extra cash each month.
Fixed Budget Pros and Cons
So think about how you want your future to be and remember that keeping to your budget will help you get there. Adding to your debt load, on the other hand, will mean that your future could be even tighter. You’ve accomplished all of the above, even putting together a nice spreadsheet that lays out your budget for the next 15 years. The only problem is that sticking to that budget isn’t as easy as you thought.