When it comes to choosing a budgeting method for your business, you can make your selection from a number of approaches. A static planning budget is one of the most popular options in this regard.
If you make a static planning budget for your business, you can look at the upcoming expenses and revenues from a fixed approach.
This means that regardless of the actual cash disbursements, cash receipts, and other transactions, the dollar amount in your budget planner book stays the same for the given period.
To understand how a static budget might play out for your business, here are more details on this approach and its overall effects on your books.
The Static Planning Budget Stays Quite Straightforward
A static planning budget is typically designed by using past data of your business’ expense and revenue for a given period. These details can be assessed on a monthly, quarterly, or yearly basis.
By putting a specific number to your upcoming expenses and revenues, your static planning budget gives you a straightforward path towards organization.
Through a fixed projection of expenses such as utilities, rent, and employee paychecks, you can know how much money your business has to spend in a given timeframe.
Similarly, a specific amount of possible revenues through sales or contracts gives you an idea of how much income your business is going to generate in the specific period.
The Approach Comes With Clear Advantages
While you still follow your business’ actual output and earnings, the static budget allows you to plan your steps and allocate your funds beforehand.
It also gives you an idea of your business’ overall health in terms of its past performance and its current status.
For instance, if there is an increase in your actual expenses as compared to the budgeted amount, your budget planner book is able to reflect that immediately. This way, you are able to know instantly when and how your output increased in the given period.
In a similar fashion, when your actual revenues improve or take a hit, you are able to see how your business is doing as compared to the results in the past.
The Planning Approach Does Come With Its Shortcomings
Perhaps the biggest shortcoming of the static planning budget comes through in a lack of adaptability to certain expenses and revenues.
If you are not careful about the possibility of fluctuation in your output and income, planning a static budget from past data can also throw you off of your expectations.
For instance, if a sudden spike in demand causes you to invest more in manufacturing materials, it might drive up your expenses. At the same time, it may also increase your revenue. In case you don’t make the correlation between the output and income, it can project an ambiguous picture of your business’ performance.
With Careful Management, You Can Benefit From This Approach
While putting a certain dollar amount in your budget planner book gives you a better hold on your business management, it also comes with certain disadvantages.
Since the approach cannot factor in fluctuating costs such as sales commission, it requires you to often combine a flexible budget for certain divisions, departments, or activities.
As long as you keep these factors and active tracking of actual finances in mind, you can benefit from a static planning budget without any issues.