One of the more common tools used to monitor revenue and expenses is the static budget (static planning), which is often referred to by managers as a guide for the period.
The static budget is commonly used in nonprofit, education, and government organizations because these institutions are typically granted a specific amount of money.
The static budget is a useful tool for managers to use as a guide for any given period as it remains unchanged.
This means that managers can use it as a way to benchmark costs and revenue while others in the organization can use it to assist with basic forecasting.
Understanding what a static budget is, how it is made, and why it is important will help you to determine if creating and implementing a static budget is appropriate for your organization.
What Is a Static Budget?
A static budget is a budget that uses predicted amounts for a given period prior to the period beginning.
The unique aspect of a static budget is that it does not change regardless of deviations in revenue and expenses. This means that the static budget is often used as a tool to gauge the performance of a business over time.
There are two primary forms of budgets: static and flexible. The latter is a dynamic budget that changes over time in response to changes in the business environment.
Both forms are reasonable applications for most businesses; however, there are some cases when one budget type might make sense over the other.
The Difference Between Static and Flexible Budgets
A flexible budget is often used in businesses that experience seasonal or cyclical changes in sales volumes.
The flexible budget allows the organization to respond to changes in demand over time, making it useful for planning incremental demands in labor, raw materials, and run rates.
A static budget remains unchanged for the duration of the period and does not take changes in cyclical or seasonal demands into consideration. It is therefore a good choice of budgeting for organizations that experience static demand or have defined budgets through grants.
This is why public institutions and educational institutions rely on them more often.
The Importance of Static Budgets / Static Planning
A static budget is essentially a base-case budget that accountants or finance leaders use as a roadmap for the period. Because the budget does not change, it is a helpful tool for monitoring expenses and revenue generation.
Assuming the static budget is made with optimal financial performance in mind, it helps to keep the business operating towards the most beneficial outcomes.
There are many ways static budgets are used by finance professionals. However the most important role of the static budget is that it acts as a good cash management tool. This is because the static budget can be used to monitor and prevent an organization from exceeding its anticipated expenses.
Similarly, it can be used to monitor sales volume against expectations. This allows business leaders to be proactive in making adjustments throughout the period to help return operations to the static-budget mean.
Because static budgets are often used in monitoring business performance, they are regularly used in variance analysis and reporting.
How To Build A Static Budget
A static budget is the result of basic forecasting. The process of building a static budget is no different than any other form of budgeting.
Bear in mind that the budget is typically based on historical information adjusted for expectations on changing demand, market expansion, and cost of goods sold, among other aspects.
It is always important to start with good data and relevant, realistic assumptions.
You can choose to build your budget based on a percentage of revenue or using actual values. It is typically recommended to use historical information to calculate a percentage of revenue.
Estimate Revenue
Base your revenue assumptions on a combination of prior years and expected sales growth for the quarter. Keep in mind that the budget will not change or be adjusted for the period, so be diligent in making your assumptions.
Estimate Fixed Costs
Similar to other forms of budgets, you can find this using historical averages. Typically, the fixed costs are represented as a percentage of revenue.
Find this by taking the average of fixed costs divided by the average of revenue and apply this ratio to your current period’s revenue projection.
Estimate Variable Costs
Identify all variable costs related to revenue generation. These might include items like raw material, labor, and other expenses associated with production.
Bear in mind that variable expenses typically go up as revenue increases and go down as revenue decreases. Find the historical average of variable expenses as a percentage of historical revenue and apply this ratio to your projected period.
Build Your Forecast
In Excel, it is easy to build a forecast for the period by taking your expected revenue projections for the period and then applying the fixed and variable expense ratios you calculated.
This will help to determine the projected net income for the period and in turn will help build a cash projection for the same period.
Using Datarails to Build Your Static Budget
Every finance department knows how challenging building a static budget can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced budgeting software that can help your team create and monitor budgets faster and more accurately than ever before.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.
This takes budgeting from time-consuming to rewarding.