A cash-flow budget helps managers determine the amount of cash being generated by a company during a specific period. The inflows and outflows of cash for a company are important because expenses need to be paid on time from the cash generated. For example, monitoring the collection of accounts receivables, which is money owed by customers, can help companies forecast the cash due in a particular period. Of course, determining how much to spend on various expenses and projecting sales is only one part of the process. Company executives also have to contend with a myriad of other factors, including projecting capital expenditures, which are large purchases of fixed assets such as machinery or a new factory.
It also allows for a more meaningful analysis of variances, as it isolates the effects of changes in activity or output from the effects of performance. A static budget is a fixed financial plan that remains constant over a specific period, often a year. It sets predetermined estimates for revenue, expenses, and other financial metrics and serves as a baseline for evaluating actual performance.
- One way to do this is by calculating the average percentage of those costs relative to historical revenue.
- Since flexible budgets use the current period’s numbers—sales, revenue, and expenses—they can help create forecasts based on multiple scenarios.
- This may not be a huge concern for companies with more predictable sales and expenses.
- With a static budget, the company will keep the original budget figures as is and simply record actual spending separately.
- Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
This is when you can dig into budget analysis — especially by reviewing variances — and uncover opportunities for growth. Static budgeting is often called fixed budgeting because they do not change during the accounting period they’re in effect — no matter the fluctuation. For a company with very stable numbers, either a static or flexible budget works simply because the numbers don’t change much. Cash flow budgets help to examine past practices to examine what’s working and what’s not and make adjustments.
Best Practices of Flexible Budgeters
Static budgets make sense for businesses operating in highly stable environments — an environment with highly predictable revenues and expenses. It may also be suitable during initial startup phases, when revenue and expenses aren’t stable, as a static budget can provide that initial baseline for planning and forecasting. Finance teams can easily identify strengths and weaknesses across the company by reviewing a static budget. The framework makes it easy to evaluate the performance of different business initiatives and departments. And once variances are identified, finance can go to department and executive leaders to flag any concerns or opportunities to make the budget work even better for the business.
Although with the flexible budget, costs would rise as sales commissions increased, so too would revenue from the additional sales generated. These variances are much smaller if a flexible budget is used instead, since a flexible budget is adjusted to take account of changes in actual sales volume. During this time, actual results are compared to the budget, and finance teams can analyze variances. While a static budget provides a strategic planning and decision-making baseline, it does not always allow for the most accurate or useful budgeting tool for SaaS companies.
The static budget is not made to be responsive to favorable and unfavorable variances over the given period. And while you can mitigate this drawback by changing the budget’s time horizon, this is an important limitation regarding the functionality of a fixed budget. Once you identify fixed and variable costs, separate them on your budget sheet.
What are the drawbacks of using a static budget?
For example, a company could apply for a short-term working capital line of credit from a bank to ensure they cash in the event a client pays late. Also, companies can ask for more flexible options for their accounts payables, which is money owed to suppliers to help with any short-term cash-flow needs. For example, lumber prices rise dramatically in the spring because more companies are building homes. These seasonal shifts can affect a builder’s overall budget and revenue, making them spend more on materials during peak seasons, so flexibility is crucial. For instance, many businesses experience a sales boom around the holidays, while others have revenue that changes based on month-to-month sales data.
Profitability Ratios: An Explainer
Mosaic’s robust analytic and reporting tools turn business performance data into actionable insights. With real-time data syncs, teams won’t miss an opportunity to identify changes in cash flow, revenue, or any other line item on the budget. If you’re committed to keeping the budget fixed, these variances will help you tell the narrative of financial performance in the short term. But in the long term, they’ll help you evaluate changes to the budget when the next planning process starts.
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For instance, take the revenue prediction of $10m from the previous example and say that it breaks down into $2.5m revenue per quarter. If you use a flexible budget, you could change your numbers based on what happens during the year. Now that we have covered the basics, it’s time to cover the common question regarding the static budget. By setting a budget and comparing actual results to the plan, unnecessary or excessive expenses can be easily identified and avoided. Datarails is an enhanced budgeting software that can help your team create and monitor budgets faster and more accurately than ever before.
Below are a few of the most common types of budgets that corporations use to accurately forecast their numbers. In some instances, you may not have sales figures to help you accurately forecast your revenue. These individuals give themselves a budget for how much they want to spend on renovating a home based on comparable home prices in the neighborhood to ensure they can make a profit. If you want to hire another team member, you can budget a fixed amount for their annual salary. Some examples include materials and direct labor (which will increase the more you produce).
Static budgets are often used by non-profit, educational, and government organizations since they have been granted a specific amount of money to be allocated for a period. The process of building a static budget virtual bookkeeping services is no different than any other form of budgeting. This means that managers can use it as a way to benchmark costs and revenue while others in the organization can use it to assist with basic forecasting.
Static budget cons
The master budget, and all the budgets included in the master budget, are examples of static
budgets. Actual results are compared to the static budget numbers as one means to evaluate company performance. However, this comparison may be like comparing apples to oranges because variable costs should follow production, which should follow sales. Thus, if sales differ from what is budgeted, then comparing actual costs to budgeted costs may not provide a clear indicator of how well the company is meeting its targets. A flexible budget created each period allows for a comparison of apples to
apples because it will calculate budgeted costs based on the actual sales activity. Many businesses benefit from flexible budgets because it’s easy to determine costs versus sales for a month than it is to forecast your fixed sales and expenses for a longer period of time.
Example of a Static Budget
So companies use a static budget as the basis from which actual costs and results are compared. A flexible budget is often used in businesses that experience seasonal or cyclical changes in sales volumes. Mosaic enables finance teams to create and analyze an array of budgeting scenarios based on different assumptions and variables. This can help finance teams identify potential risks and opportunities and make informed decisions about resource allocation and budgeting priorities.