The Difference between Fixed and Flexible Budget
If you’re a business owner, you’re likely focused on many important decisions, including budgeting. One of the critical questions you’ll ask yourself is whether you should embrace a flexible or fixed budgeting approach. In this article, we’ll look at the difference between the two and provide guidance for choosing which one is the right fit for you.
What is a Fixed Budget?
A fixed budget is a budget that you set in advance of the fiscal year or quarter and adhere to throughout it. This budget is static and doesn’t change, regardless of how your business performs or any external factors that may come to play.
For example, if your business generates $10,000 per month, and your fixed budget is $5,000, you will not allocate any funds over and above that amount. Even if you find that you have extra cash at the end of the month, you won’t change your budget to reflect that.
What is a Flexible Budget?
A flexible budget, on the other hand, is more adaptable. It’s a budget that you can adjust as needed in response to fluctuations in your business’s revenue and expenses.
For example, if your business generates $10,000 per month, and your flexible budget is $5,000, you can allocate your funds accordingly. If you end up generating more revenue, you can adjust your budget to make more investments in your business (e.g., hiring new employees, investing in a new marketing campaign, etc.).
Which One is Right for You?
There’s no definitive answer to this question, as it depends largely on the needs of your business. That being said, there are a few key things to consider when choosing between a fixed or flexible budget.
Firstly, think about the level of predictability in your business; if you operate in an industry with volatile or unpredictable revenue flows, a flexible budget may be the better choice.
Secondly, evaluate how frequently your business experiences unexpected expenses- if your business’s expenses fluctuate unpredictably, you are much better with a flexible budget.
In conclusion, neither a fixed nor flexible budget is inherently superior – the choice you make depends entirely on the unique factors of your business. Whichever you choose, make sure you are flexible and ready to pivot quickly if needed.
Table difference between fixed and flexible budget
| Fixed Budget | Flexible Budget | |
|---|---|---|
| Definition | A budget that remains unchanged regardless of any changes in the actual sales or production levels. | A budget that adjusts based on the actual sales or production levels. |
| Uses | Used by companies that have stable sales and production levels. | Used by companies that experience fluctuations in sales and production levels. |
| Advantages | Provides a stable baseline for planning and decision-making. | Allows for more accurate budgeting based on actual sales or production levels. |
| Disadvantages | Cannot account for changes in sales or production levels. | Requires frequent updates to remain accurate. |