Fixed Vs. Flexible Budget

Updated March 23, 2017

Developing a budget for your business is crucial to keep operations running smoothly. Often, business operations are more conducive to fixed budgets which clearly define company costs and income streams. However, some businesses in a more turbulent economic environment must plan ahead for multiple economic realities; in these situations, a flexible budget is likely more appropriate. Using flexible budgets in the proper situations can help protect your business from suffering unexpected shortfalls in cash flow.

Fixed Budget

A fixed budget, also known as a static budget, projects static levels of known income and expenses over a set period of time. Fixed budgets are much simpler to create and to read than flexible budgets and are generally acceptable for situations where the levels of income and expense are not expected to fluctuate through the duration of the budgeting period.

Flexible Budget

When a fixed budget is adjusted to account for variable results, it can be referred to as a flexible budget. When implemented during the budgeting process, a flexible budget helps a business account for future changes in any expense or income account. Multiple flexible budgets drawn up to forecast various levels of economic activity may be complicated but prepare a business well for any fluctuations in business levels, planned or otherwise.

Relevant Factors

A flexible budget starts with identifying the relevant factors that are most likely to vary during the budgetary period. Use different figures near the expected figure in the budget for the relevant factor and substitute those figures into the budget to see how business fluctuations would affect your company. For example, say a seasonal retail store traditionally does about £32,500 worth of business during the holiday months and only £16,250 during off season months. Plotting in different figures for holiday and off season sales will help the business owner develop contingency plans in the event of a surplus or a budgetary shortcoming.

Reasons to Be Flexible

Fixed budgets are a common mainstay in many businesses, but flexible budgets do have many applications where they can be preferable to static budgets. Larger corporations can use flexible budgets within smaller departments to keep shortcomings from one branch of business operations from affecting the entire company. Seasonal businesses, businesses affected heavily by weather conditions and companies frequently introducing new products also develop flexible budgeting practices.

Cite this Article A tool to create a citation to reference this article Cite this Article

About the Author