Types of Budgets

Budgeting is an essential part of financial management, acting as a control system that helps businesses evaluate their financial performance. Different types of budgets serve different purposes, depending on the nature of the business.

Fixed Budget (Static Budget)

A fixed budget, also known as a static budget, is based on a predetermined level of sales or revenue. This type of budget remains constant regardless of changes in business activity.

Advantages:

• Simple and easy to prepare.
• Useful for industries with stable and predictable revenues.
• Provides a clear financial roadmap.

Limitations:

• Does not account for fluctuations in business activity.
• May become outdated quickly in dynamic industries.

Flexed Budget (Flexible Budget)

A flexed budget adjusts according to actual levels of business activity. It is created after a control period ends and is based on variable costs, contribution margins, and fixed costs. Comparing a flexed budget to a fixed budget helps businesses analyze variances and make necessary adjustments.

Advantages:

• Provides better financial control.
• Adjusts to changes in business operations.
• Helps identify variances for better decision-making.

Limitations:

• More complex to prepare compared to a fixed budget.
• Requires frequent updates and analysis.

Rolling Budget

A rolling budget is continuously updated by adding a new period (e.g., a month) to an existing budget. This approach ensures that businesses always have a forward-looking 12-month budget.

Advantages:

• Encourages continuous financial planning.
• Provides a more accurate and up-to-date budget.
• Improves adaptability to changing market conditions.

Limitations:

• Requires regular updates, increasing workload.
• Can be time-consuming for small businesses with limited resources.

Conclusion

Choosing the right type of budget depends on a company's financial goals, industry conditions, and operational complexity. While fixed budgets provide stability, flexed budgets offer adaptability, and rolling budgets ensure continuous financial planning. 

Links

• Types of Budgets Explained