What is a Static Budget?
A static budget is a budget that remains in place, even when changes in the volume of sales, expenses, or other relevant factors change. It is not unusual for the master or main budget of a corporation or other type of organization to be structured as a static budgeting plan, while the budgets associated with individual departments are somewhat more fluid and influenced by shifts in sales volume and expenses. As a budgeting tool, the use of this model helps to ensure that the organization does not spend more resources than it has available, assuming that the plan for meeting the budget allows for potential dips in sales revenue by transferring funds from contingency and other accounts.
With a static budget that is applicable to an entire organization, each department or group within that organization is provided with a maximum amount of funds to work with for the entire operating year. At department level, the goal is to find ways to maximize the use of that income, gaining the most benefit while expending the least amount of the static budget allocation. This often involves establishing specific criteria on how the funds must be used for various expenses, including commissions, administrative costs, and other essentials.
For example, if the static budget for a company allocates $1 million US Dollars (USD) for the payment of commissions to the sales department, that department will be responsible for creating some type of guidelines for how commissions are paid. Depending on the structure of the business, a simple tier approach may work well. In order to issue the full $1 million USD in commissions throughout the operating year, the sales volume may have to be somewhere between $19 million to $20 million USD. If the total sales volume is in the range of $15 million USD, then the department only issues total commissions of $750,000 USD. With this type of approach, the department has some flexibility in managing its expenses, while staying well within the budgetary restrictions put in place by the master static budget. As long as the sales volume variance is such that the actual sales do not exceed $20 million USD, there is no need to find ways to move funds from one budget line item to another in order to pay commissions, and the static budget remains intact.
The concept of a static budget is not limited to use in businesses and other large organizations. Households can also apply the general idea as a means of keeping expenses from exceeding income. By planning carefully, it is possible to establish a budget that allows for a maximum amount of funds to be allocated to each line item, with the proviso that there is no compunction to actually spend the entire allocated amount. This creates a situation where there is a static budget balance, in which the actual expenses incurred for the period are less than the maximum amounts allowed for one or more budget line items. When this type of variance occurs, households can choose to carry the unspent resources over into the next budget period, transfer the resources into an interest bearing account, or use the excess funds for some type of purchase that is outside the budget. In any case, the household operates with a balanced budget, which is the ultimate goal.
Cupcake15- Most households handle the static budget vs. the flexible budget by creating a static budget year round but have a savings account cushion that can be used for the flexible budget throughout the year.
Having additional savings really allows you to have peace of mind with you are faced with an unexpected expenditures.
Most financial advisors agree that people should have three to six months of living expenses in the bank and Suze Orman even suggests that people should save eight months of living expenses.
Static budgets are often used by people that want to stay out of debt.
Households often use static budgets in order to create monthly budgets. Since these categories in the budget tend to be the same month after month, it makes it easy to budget.
For example, your monthly mortgage is a fixed expense because you know that you will generally pay the same amount every month.
Your car payment is another example of a fixed expense that can easily be added to a static budget. It is important to have static and flexible budgets because you need to have money set aside for expenses that you did not anticipate like illness or car repair problems.
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