How to Define Static Budgets

In business, static budgets are defined as projected income and expenses based on initial estimates. They are always put together before the time period covered by the static budget actually occurs. It is essentially the first draft of a budget and is later compared to actual income and expenses.

Difficulty:

Easy

Instructions

1. Calculate what income is expected over the course of the budget term. This should be the best estimates based on past income and projected income. Since it is income for a period of time in the future it is not expected to be exact but it should be as precise as possible.

2. Go through all the expenses expected to be paid over the course of the budget term. This should be best estimates based on past expenses and expected outlays of cash. Since these expenses are for a period of time in the future they are not expected to be exact but they should be as accurate as they can be. This should be a negative number since they are expenses.

3. Add the expected income and the expected expenses together and you have your static budget. This is based on the best information available at the time. Static budgets are always put together before the period of time covered by the budget.

4. Understand that static budgets are almost never 100% correct. There are always unexpected expenses and often unexpected income. The actual expenses and income are called flexible budgets. They adjust for whatever happens. It is common for the values of static budgets to be dramatically different than figures in flexible budgets. The difference is called the static budget variance.

5. Realize the value of static budgets. They are very important for planning. Businesses need to allocate resources based on their best guess of what they will have. Static budgets are created to give companies a guideline for their expectations and expenditures.

6. Figure the success or failure of a business based on static budgets. When static budgets are compared to flexible budgets, the resulting static budget variance reveals the answer. If the flexible budget has more income and fewer expenses than the static budget, then business did better than expected.