Fixed budgets remain the same throughout a financial period, providing stability and expense control, but lack flexibility. Small business owners prefer them for improved savings and planning, while large conglomerates prefer flexible budgets due to market fluctuations.
A fixed budget is a financial document that remains the same throughout a financial period, regardless of any unexpected and spontaneous events that may occur. Flexible or variable budgets, on the other hand, change from time to time based on changes in spending. The benefits of a fixed budget include greater stability, better savings, and easier future planning, while the disadvantages include less flexibility.
Possibly the biggest drawback to fixed budgeting is that it doesn’t allow an individual or business owner to adjust the budget based on a change in the situation, such as the loss of a job or reduced profits. This makes it especially difficult to react to the kind of unexpected changes that often occur in the business world, as well as in life in general. For this reason, most large conglomerates prefer flexible budgeting to fixed budgeting.
However, small business owners often prefer fixed budgets because they provide a much higher level of stability and expense control. Fixed budgeting involves setting a maximum spending limit, which means that the individual or business owner cannot spend beyond this point. This is beneficial because it prevents one from spending too much on a whim. If a person suddenly received a bonus, for example, they would not be allowed to spend anything if they already exceeded their spending limit.
Another benefit of a fixed budget is that it would force a person to direct that bonus into their savings account. With a flexible budget, you might decide to allocate it to a spontaneous purchase, like an HDTV or laptop. In fact, you should wait until the next fiscal year, at which time you can adjust the budget by increasing the allowable amount of discretionary spending.
The biggest benefit to the more controlled spending and improved savings that result from a fixed budget is more planning ahead. That extra money tucked away in savings could be extremely important if an accident were to happen. Or the person may get married, have a child, and suddenly realize that he and his wife need to establish a college fund.
A fixed budget is an optimal option for small business owners and individuals. It provides a level of stability and control that cannot be found on a flexible budget. The problem with a fixed budget, however, is that it doesn’t work well in the business world, where the market is constantly fluctuating.
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