Fixed budgets are budgets that are prepared in advance and do not change regardless of changes in the level of activity or volume of sales. They are also known as static budgets. Fixed budgets are typically prepared for a specific period of time, such as a fiscal year or a quarter. The budget is set based on the expected level of activity or volume of sales for that period.
Fixed budgets are useful for planning purposes as they provide a benchmark against which actual performance can be compared. They are also useful for setting goals and targets for the organization. However, fixed budgets may not be appropriate in all circumstances, as they do not account for changes in the level of activity or volume of sales. This means that if actual activity or sales volumes are different from what was expected, the fixed budget may not provide an accurate reflection of the actual costs and revenues of the organization.
Fixed budgets can be useful in many different types of organizations, from small businesses to large corporations. However, they may not be appropriate in all circumstances. For example, in industries where the level of activity or volume of sales can vary significantly from year to year, a fixed budget may not be appropriate. In these cases, a flexible budget that accounts for changes in activity levels or sales volumes may be more appropriate.
Advantages of Fixed Budgets:
- Planning and Goal-Setting: Fixed budgets are useful for planning purposes as they provide a benchmark against which actual performance can be compared. They are also useful for setting goals and targets for the organization. By setting goals and targets, organizations can work towards achieving those goals and targets, which can help them to improve their performance and achieve success.
- Control: Fixed budgets provide a basis for controlling costs and managing resources. By setting a budget, organizations can control their spending and ensure that resources are used efficiently and effectively.
- Motivation: Fixed budgets can also provide motivation for employees. By setting goals and targets, employees can work towards achieving those goals and targets, which can help to motivate them and improve their performance.
- Accountability: Fixed budgets provide a basis for accountability. By setting a budget, organizations can hold employees and managers accountable for their performance. This can help to ensure that everyone is working towards the same goals and objectives.
Disadvantages of Fixed Budgets:
- Inflexibility: The main disadvantage of fixed budgets is their inflexibility. Fixed budgets do not account for changes in the level of activity or volume of sales. This means that if actual activity or sales volumes are different from what was expected, the fixed budget may not provide an accurate reflection of the actual costs and revenues of the organization.
- Unrealistic Goals: Fixed budgets can also lead to unrealistic goals and targets being set. If the fixed budget is not based on realistic assumptions about the level of activity or volume of sales, then the goals and targets set may be unrealistic.
- Lack of Motivation: Fixed budgets can also lead to a lack of motivation among employees. If employees feel that the goals and targets set are unrealistic or unachievable, then they may become demotivated and their performance may suffer.
- Lack of Creativity: Fixed budgets can also lead to a lack of creativity. If employees are focused solely on achieving the goals and targets set in the fixed budget, then they may not have the freedom to be creative and come up with new ideas.
Examples of Fixed Budgets:
- Sales Budget: A fixed budget can be prepared for sales based on the expected level of sales for a specific period of time. The sales budget will typically include the expected volume of sales, the expected revenue from those sales, and the expected cost of goods sold.
- Production Budget: A fixed budget can also be prepared for production based on the expected level of demand for a specific period of time. The production budget will typically include the expected volume of production, the expected cost of production, and the expected inventory levels.
- Overhead Budget: A fixed budget can also be prepared for overhead costs, such as rent, utilities, and insurance. The overhead budget will typically include the expected costs for each overhead item for the specific period of time.
- Personnel Budget: A fixed budget can also be prepared for personnel costs, such as salaries and benefits. The personnel budget will typically include the expected number of employees, their salaries, and the cost of benefits such as healthcare and retirement plans.
- Marketing Budget: A fixed budget can also be prepared for marketing expenses, such as advertising and promotional activities. The marketing budget will typically include the expected cost of each marketing activity for the specific period of time.
- Research and Development Budget: A fixed budget can also be prepared for research and development expenses. The research and development budget will typically include the expected cost of research and development activities for the specific period of time.
- Capital Expenditure Budget: A fixed budget can also be prepared for capital expenditures, such as the purchase of equipment or buildings. The capital expenditure budget will typically include the expected cost of each capital expenditure item for the specific period of time.
Fixed budgets preparation
Preparing a fixed budget involves a series of steps that help to ensure the budget is accurate and reflects the organization’s goals and priorities. The steps may vary slightly depending on the specific type of budget being prepared, but generally include the following:
- Define the period: Determine the specific period of time for which the budget will be prepared. This could be a year, a quarter, or any other specific time frame.
- Set goals: Determine the organization’s overall goals and objectives for the period covered by the budget. These goals will help guide the budget preparation process and ensure that the budget aligns with the organization’s priorities.
- Estimate revenues: Estimate the organization’s expected revenues for the period covered by the budget. This could include revenues from sales, grants, donations, or other sources.
- Estimate expenses: Estimate the organization’s expected expenses for the period covered by the budget. This could include expenses for personnel, marketing, research and development, overhead, and capital expenditures, among others.
- Allocate expenses: Allocate the estimated expenses to the various departments or functions within the organization. This will help to ensure that each department has a clear understanding of its budget and its role in achieving the organization’s overall goals.
- Monitor actual performance: Monitor actual performance against the budget on an ongoing basis. This will help to identify any areas where actual performance differs from the budget and allow for adjustments to be made as needed.
- Review and revise: Review the budget periodically and revise it as needed. This could be done quarterly, semi-annually, or annually, depending on the organization’s needs.
Fixed Budgets Technique
Fixed budgets are prepared using various techniques and approaches to ensure that they are accurate and reflect the organization’s goals and priorities. Some of the commonly used techniques for preparing fixed budgets are:
- Historical Analysis: This technique involves analyzing past financial data to identify trends and patterns in revenue and expenses. Historical data can provide valuable insights into how the organization’s finances have evolved over time and can be used to develop realistic estimates for future budgets.
- Top-Down Approach: This technique involves setting the overall budget target at the highest level of the organization and then allocating funds to individual departments or functions based on their needs and priorities. The top-down approach can be useful in ensuring that the budget is aligned with the organization’s overall goals and priorities.
- Bottom-Up Approach: This technique involves preparing budgets at the department or function level and then consolidating them to develop an overall budget for the organization. The bottom-up approach can be useful in ensuring that each department or function has a clear understanding of its budget and its role in achieving the organization’s overall goals.
- Zero-Based Budgeting: This technique involves starting from scratch and preparing a budget for each department or function based on its needs and priorities, regardless of what was budgeted in the previous period. Zero-based budgeting can be useful in identifying areas where costs can be reduced or eliminated.
- Activity-Based Budgeting: This technique involves identifying the activities or processes that drive costs within the organization and then developing budgets based on those activities. Activity-based budgeting can be useful in ensuring that resources are allocated efficiently and effectively.
- Value-Based Budgeting: This technique involves identifying the value that each department or function adds to the organization and then developing budgets based on that value. Value-based budgeting can be useful in ensuring that resources are allocated to activities that provide the greatest benefit to the organization.