Static Budget vs. Flexible Budget: Which is Right for Your Business?

What is a static budget?

A static budget stays the same regardless of sales or revenue changes within the company. Instead, it uses predicted fixed costs for a given period, such as a month, quarter, or year to determine how much the company can allocate to various projects, business ideas, and activities.

Static budgets are fixed; they won't fluctuate with changes to your business sales volume or figures in a given period. Instead, your budget will remain the same whether you earn $500,000 in revenue or $5,000,000 in revenue.

These budgets can easily help businesses monitor their performance month over month or year over year, making it easier to create visual representations of budgeting information because there are only changes to them once it's time to plan another one.

Static budgets are forecasts of revenue versus expenses like office rent, cost per acquisition (CPA), marketing, and so forth over any given period and remain unchanged regardless of the number of sales or how much money a business makes during that period.

Finance professionals and management teams often use these types of budgets because they can help them gauge performance over a specific period of time, but that doesn't mean these budgets are the most effective for measuring the return on investment (ROI) of various activities.

Pros of a static budget

Simply put, a static budget can help businesses monitor expenses, sales, and revenue to determine how to allocate funds and ensure each department stays within its budget. The most significant benefits of a static budget include the following:

Easy reporting

Because a static budget remains unchanged regardless of sales volume or revenue, they're easy to track and report on. For instance, you might have a budget for one project that differs from another within the same department, allowing you to track how much each project costs over time.

Prevent overspending

The main goal of a static budget is to prevent overspending. In addition, by knowing a hard number you can't go over, a static budget can prevent you from making financial mistakes that often plague small businesses and startups.

Acts as a cash flow planning tool

A static budget can help you plan what to do with your cash flow and where to allocate resources based on your business's needs.

Cons of a static budget

Static budgets are the opposite of flexible budgets because they're fixed. Unfortunately, most businesses can't accurately forecast their expenses to create a fixed budget that gives them enough wiggle room to spend money on important projects and items like equipment.

A static budget is best suited for businesses with predictable sales and costs or those that can predict their sales and costs in the short term. For instance, a digital marketing company might use a static budget for a month depending on client sales and known fixed expenses.

Other types of companies may have fixed costs associated with labor, advertising, utilities, and operations. A static budget may be beneficial even though they can't necessarily predict their revenue unless costs are agreed upon by the customer upfront.

A good example of a company that may benefit from a fixed budget is a contractor who renovates homes. This is because they already know how much the customer will pay and then can create a budget based on their fixed, predictable costs to help predict profit from each particular job.

Static budget use cases

So when should you use a static budget? Any business in any industry can benefit from static budgets throughout its organization.

For example, you might have a static budget for labor, raw materials, and various projects in which you can predict the expenses. Situations when a static budget is appropriate include:

Short-term budgets

Fixed budgets are ideal for short-term projects and deadlines. For instance, if you have a project due for a client in a month, you can determine all your fixed costs and create a budget based on how much the client will pay you.

Predictable expenses

Any business with predictable expenses can benefit from a static budget because they already know how much it will spend in a given period.

Predictable expenses like parts, labor, tools, and materials are used in various types of projects and can help you determine whether you need to cut costs or have more flexibility in your budget.

Predictable sales

Static budgets are usually ideal for companies with predictable sales. For example, a freelancer on a retainer knows how much they will earn monthly, allowing them to create a budget for any project. The same may be true for your business if you forecast your sales as accurately as possible.

This type of budget is best suited for nonprofit and government organizations because their revenues and expenses stay the same over time.

However, any business can use a static budget as long as they know how much money they will earn versus how much they will spend.

For instance, you can use a fixed budget for your ROI marketing efforts to determine how much you've spent on marketing versus how much you've earned in revenue by attracting new customers.

What is a flexible budget?

A flexible budget is the exact opposite of a static budget — it allows you to adjust how much you allocate to various departments, projects, and activities based on your business' revenue and changes in sales volume.

These budgets enable companies to change strategies and shift directions when something changes within the organization. While a static budget is the same throughout a particular period and doesn't take seasonality or changes in sales into account, flex budgets fluctuate with sales, production, and other business activities.

Flex budgets can be used for everything from marketing to labor costs to increase production volumes during the busy season.For instance, retail stores can benefit from a flexible budget that allows them to hire more employees during the holidays when they're the busiest because they have increased sales volumes.

Flexible budgets usually work with percentages. For example, a company may allocate 20% of its revenue to marketing initiatives, regardless of what those marketing initiatives are.

Therefore, if a company has a revenue of $500,000, it allocates 100,000 towards various marketing campaigns like social media, email marketing, paid traffic ads, and traditional marketing strategies.

However, if the company increases its revenue to $1,000,000, its marketing budget becomes $200,000, allowing it to invest more money into marketing initiatives that, in turn, result in more sales.

Like static budgets, flexible budgets can be used to evaluate your business's performance, but it's much more complicated because the budget changes based on various fluctuations within the business. Flexible and static budgets can be used together to evaluate the performance of your business activities and their ROI.

Flexible budget pros

Since flex budgets shift depending on sales and revenue, they offer several benefits a static budget can't, such as:

Allows you to address changes

Changes in business are quite common, especially for startups and small businesses that experience frequent fluctuations and seasonality. Your sales might be soaring high one month and incredibly low the next, especially if you're just starting out.

Flexible budgets allow you to adjust how much you spend on projects and different business activities based on your revenue to prevent overspending, allowing you to adjust easily to change.

For instance, if you increase sales in one month, it may be tempting to take it as a profit. Nevertheless, you should consider spending more in another area of the business to increase sales in the future.

Less rigid

Static budgets are strict and don't allow you to pull money from one project to another. Instead, if you reach your budget and still need to spend more, you'll have to compromise. Consider a house flipper.

These individuals give themselves a budget for how much they want to spend on renovating a home based on comparable home prices in the neighborhood to ensure they can make a profit.

Unfortunately, projects rarely go as planned. When they end up spending too much on one project, it leaves them with less for another because they have fixed budgets. Since they know there's a price ceiling for homes in the area, they can't charge more just because they spent more.

Luckily, most businesses don't work like this. There's no ceiling for how many sales you can make as long as you have inventory. A flex budget allows you to choose a percentage of your overall revenue you want to put toward a specific goal, so when you sell more, you can spend more.

More accurate financials

Flexible budgets are more accurate than static budgets because it's almost impossible to predict all of your costs. For example, every business has some fixed costs like rent, but there are several variable costs and new costs that seem to pop up every day.

With a flexible budget, you'll know exactly how much your business spends on these variable costs, and it won't impact your ability to afford various internal and external projects like marketing campaigns, customer service, labor, and equipment.

Mitigates risk

What happens if you have a static budget and go over it? There's always the risk of overspending because you have to.

A static budget doesn't fluctuate based on your needs, which can delay projects and impact your business in several ways. While your static budget should prevent overspending, not having flexibility can cause issues.

For instance, if you're running a marketing campaign and run out of money, you can't effectively measure the results of your campaign because you ended it too soon. Meanwhile, if you're developing a new product and don't accurately predict the cost, you may run out of money before ever actually finishing it.

Accounts for unexpected expenses

Unexpected expenses can happen at any time. Your equipment can malfunction, you can get sued, or a pipe could burst in your office. Whatever happens, you'll need to pay for it. Unfortunately, static budgets leave no room for unexpected costs as a part of doing business, so if you happen to have one of these emergencies, you might not have enough funds to pay for them.

On the other hand, a flex budget accounts for these issues, allowing you to mitigate this type of risk by helping you pay for unexpected expenses when they happen.

Cons of flexible budgets

Flexible budgets are inherently more complicated than static budgets because they require more financial oversight and frequent monitoring. Since your budget will change depending on various conditions and factors, it's crucial to monitor your revenue and expenses regularly throughout your various projects.

Additionally, there's less accountability with flexible budgets. You may not feel the need to stick to the original budget in hopes your sales will increase over time, which could cause you to overspend.

Flexible budget use cases

As we've mentioned, businesses may use both flexible and static budgets throughout their organizations, enabling them to allocate resources more effectively. However, there are some situations when a flexible budget is more appropriate, such as:

Revenue not updated or unknown

In some instances, you may not have sales figures to help you accurately forecast your revenue.

Additionally, startups and new businesses don't have any sales figures they can use to help them create a budget, so a flexible budget with different percentages allocated to each department or project typically works best.

Revenue is subject to change

Some businesses can predict when their revenue will change. For instance, many businesses experience a sales boom around the holidays, while others have revenue that changes based on month-to-month sales data.

If your revenue is subject to change, it's unpredictable, and a fixed budget could leave you with little left to take as profit or allocate to other areas of the business.

Seasonal businesses

Seasonal businesses, including med spas, snow removal and landscaping businesses, and tax and accounting services, know when they can experience an increase or decrease in revenue. These businesses also have various fixed costs they can use to help determine their budget. However, since their revenue is subject to change, they can't allocate the same amount of resources to various projects year-round.

Some types of businesses that benefit from a flexible budget include startups, restaurants, hotels, and seasonal businesses because they must all respond to rapid changes in their business to keep it profitable.

Factors to consider when choosing between static and flexible budgeting

Is a static or flexible budget better for your business? Ultimately, it depends.

Some businesses use both budget types to allocate funds accurately to departments and specific activities. For example, they may use a flexible budget for marketing purposes and a static budget for company events.

Business type and industry

Some businesses and industries are best suited for static budgets because they have predictable and fixed expenses and revenues. For instance, nonprofits know how much money they have to spend from grants and donations to allocate their budget toward various initiatives properly.

However, most businesses don't know how much money they're going to make from sales. While you can use various sales projection tools, they're projections, not exact estimates. Therefore, flexible budgets are ideal for most businesses, especially retailers and restaurants.

Company size

Many businesses benefit from flexible budgets because it's easy to determine costs versus sales for a month than it is to forecast your fixed sales and expenses for a longer period of time. Since flex budgets are adjusted depending on cost changes and revenue throughout the year, they provide more flexibility. However, small businesses can still benefit from fixed budgets which can help them increase their revenue by keeping expenses low.

Seasonality

Seasonal businesses are more likely to benefit from flexible budgets that change with their business needs. Static budgets are too strict and can cause a seasonal budget to spend more money than the company actually grosses during slow periods.

Additionally, there are often cost changes depending on the season. For example, lumber prices rise dramatically in the spring because more companies are building homes. These seasonal shifts can affect a builder's overall budget and revenue, making them spend more on materials during peak seasons, so flexibility is crucial.

Tips for implementing and monitoring a budget

Every business needs a budget to effectively manage its finances and help it scale. Regardless of the type of type you choose, here are a few tips for building and implementing a budget:

Set realistic goals and objectives

Identifying your financial goals is crucial. For example, some companies want to be acquired by others, while other small businesses simply want to make enough to pay their employees and make a profit that affords owners and stakeholders a comfortable life. If you want to scale, your budget will need to be more complex.

However, if you're a solopreneur, there's more flexibility in your budget.

Create a detailed budget plan

Once you've determined your overall financial goals, you can begin creating your budget by making a list of all your fixed and variable business expenses and comparing them to past sales and revenue data.

If you're using a flexible budget, it's crucial to determine what percentage of revenue you'll allocate to different areas of the business, which may depend on how much you want to earn in profits and how much you're able to reduce expenses.

Monitor actual costs and revenue regularly

Static budget variance is the difference between your projected expenses versus actual expenses or projected revenue versus actual revenue.

Flexible budget variance is also possible but occurs when there's a difference between the budgeted and actual expenses rather than actual sales volume. Flex budgets require you to monitor your spending and revenue throughout the year because they fluctuate based on these factors, providing more accuracy when compared to actual results.

However, even if you're using a fixed budget, you should monitor your financial performance throughout the year to help you make real-time decisions that can affect the health of your business.

Use budgeting tools to streamline the process and improve accuracy

Budgeting tools like ERPs, accounting software, and budget builders can help you accurately plan your budget.

For instance, ERPs — enterprise resource planning software — enable you to manage various aspects of the business and can provide financial forecasts based on inventory, sales, procurement, and marketing data.

Regularly assess your budget and adjust accordingly

Whether you use a static or flexible budget, you should continue to monitor your business finances. It's not enough to have a budget; you must determine whether it makes sense based on your overall business goals and realistic expectations.

Reviewing your budget monthly, quarterly, and annually can help you cut costs and find new ways to improve your business operations. In addition, you can increase your return on investment (ROI) to dramatically increase the impact of your marketing campaigns while reducing overall spend.

Mailchimp's all-in-one marketing automation provides a suite of tools designed to help you scale your business and cut costs to increase your bottom line and improve budget performance.