A static budget is another name for a fixed amount of financial assets that a business entity plans ahead of the operation. It is most effectively used by companies that can easily predict their sales and expenses.
Explanation:
Static, or, in other words, non-flexible, budget is planned by a business entity in advance and is based on the expected expenses and revenues. If the company has enough credible information as the basis for budget planning, it is reasonable to use static budgeting approach.
For example, monopoly companies handle predictable data when planning their sales and expenses because it is unlikely that an unpredictable turn of events will take place in a non-competitive market.
The definition of a static budget is best understood through its comparison with a flexible budget. On the contrary to the static budget, the flexible budget might be changed throughout the reporting period.
Thus, the costs and expenses can be corrected depending on the alterations in the course of a company’s performance. However, when planning a static budget, one cannot change it along the way. It remains static until the end of the reporting period.
One of the advantages of a static budget is that it provides an opportunity to calculate the differences between the predicted expenditures and revenues with the actual numbers. Such differences are called static budget variances and help companies regulate their budgeting in the future.
The calculation of variances allows businesses to obtain exact data concerning the difference between predicted sales and expenses and actual ones. Thus, a static budget is a useful approach to planning a company’s financial assets that contribute to more exact budget predictions for the future.