Budgets serve as a kind of financial road map for a given time frame and advise both individuals and corporations on how best to divide their funds in accordance with anticipated revenue and expenses. Fixed and flexible budgets are the two primary categories that stand out in the field of budgeting. They all have various purposes and advantages as well as disadvantages, therefore it's critical to distinguish between them to make wise investment choices.
The type of business, the predictability of the business environment, and particular corporate goals all influence the decision between flexible and fixed budgets. Whereas flexible budgets adjust to changing demand, variable costs, and variable expenses, fixed budgets are better suited to stable situations with production and constant costs. So which is best for your situation? In this blog, we will go through the difference between fixed and flexible budgets which will help you to make sure decisions. Let's dive in!
What is a fixed budget?
A fixed budget is one kind of budget where revenues and expenses are anticipated beforehand. No matter what, this budget remains constant. Fixed budgets work best for businesses that are stable and do similar tasks. However, in circumstances where there are variables, fixed budgets are less suitable.
Even if production or company activities alter after a decision is made, the fixed budget remains unchanged. Since costs and expenses must stay the same for at least those few months fixed budget is ideal. Before estimating anticipated income and operating activity costs, this budget considers a number of variables. Sales volume and fixed expenses like production or equipment leasing are examples of this.
Assume that at the start of the year, Bakers, a bakery company, created a set budget based on anticipated production and sales volume. The budget shows $80,000 in revenue as fixed expenses, which comprise rent, supplies, machinery, and insurance in dollar amounts of $2,500, $2,000, $3,000, and $1,500. However, sales volume grew from 2,000 rooms to 2,600 units over the course of the year, exceeding performance targets. However, the business kept to the current budget because it was created without any preparations for future adjustments.
Pros of a fixed budget:
A fixed budget keeps you on track by establishing specific spending restrictions. It's an excellent technique to budget for predictable expenses while avoiding overspending. By organizing everything ahead of time, you may save money more effectively and achieve your financial objectives without having to worry about unexpected expenses.
Cons of a fixed budget:
Even with a written budget in place, it can be intimidating, particularly when unexpected expenses come. It provides minimal room for change, such as unexpected medical expenses or inflation. This can make it tough to adjust to real-world socioeconomic situations.
What is a flexible budget?
Flexible budgets are adaptable to the needs. For example, if a firm finds that it can sell more of its products by increasing its advertising expenditure, a flexible budget will assist it in doing so, which is why a flexible budget is ideal for companies that experience a lot of change in a short amount of time. As the name implies, it is the polar opposite of fixed budgets, which incorporate variable factors such as sales volume and output, and are created by taking into account a company's variable cost of goods sold and variable production.
By adopting changes inside a company to its sales volume, operations, and outcomes, this budget enables more informed business decisions and guides organizations to take measures that are consistent with the existing corporate environment.
A shoe company created a budget based on the manufacturer's projected sales volume and average production. The sales revenue for the time was recorded as $100,000, with material expenses, personnel expenses, marketing and advertising charges, and rent and utilities bills of $3,000, $3,000, $2,500, and $2,000. However, the new footwear collection had a significant surge in demand, leaving the company with extra luxury for materialistic staff. Shoemakers decide to expand their budget to $150,000 to construct more shoes, citing a significant rise in sales and planned items. This is how a flexible budget works: it is adaptable to shifting market conditions and corporate needs.
Pros of a flexible budget:
Flexible budgets are easily adaptable to changing conditions, making them ideal for variable income or unforeseen expenses. It helps you to tailor your spending to your present financial circumstances, giving you more control and minimizing stress when things don't go as planned.
Cons of a flexible budget :
A flexible budget increases the danger of overspending. Without clear boundaries, it's easy to overlook and surpass your financial objectives. It can also necessitate continuous maintenance and adjustment, which can be burdensome for someone looking for a simple solution.
What is the difference between fixed and flexible budget?
Take a look at the chart below to better understand the difference between fixed and flexible budgets and make informed decisions based on one’s needs.
Meaning:
Fixed Budget: It is a budget that remains constant, regardless of how much a company's activities alter.
Flexible Budget: It is a budget that changes depending on the level of activity or other circumstances in the firm.
The capacity to adapt:
Fixed Budget: A fixed budget is one that never changes.
Flexible Budget: The flexible budget can be adjusted to reflect the real state of the company.
When should you use it?
Fixed Budget: It works well for companies that require short-term strategies or consistently perform the same amount of work.
Flexible Budget: It works well for companies where tasks vary.
Objective:
Fixed Budget: Mainly used to assess how well the firm is performing in comparison to the plan.
Flexible Budget: It is mostly used to gain a better understanding of performance by analyzing actual activity levels.
Pros:
Fixed Budget: Fixed Budget simplifies planning and tracking and works effectively when things do not change frequently.
Flexible Budget: Flexible Budget is more accurate in displaying how the business is performing and adapting to business developments.
Cons:
Fixed Budget: If circumstances change, it may no longer accurately reflect actual business scenarios.
Flexible Budget: It requires a thorough understanding of how expenses fluctuate in response to business activity.
Conclusion:
Your financial circumstances and particular objectives will determine which financial plan is best for you fixed or flexible. A flexible budget allows the flexibility to adjust to changing conditions, whereas a fixed budget offers stability and predictability. You can make better judgments by checking the above table showing the difference between fixed and flexible budgets and making sure your budget aligns with your priorities and needs by being aware of each one's advantages and disadvantages. For those on a tight budget or looking for rapid credit solutions, platforms like Viva Money offer simply accessible loan options of up to ₹2 lakh with 0% interest for up to 51 days, making it simple to stay within your means and stay ahead of the game.
