A fixed budget is a budget that does not change during the time period it covers, regardless of changes in business activity. It is different from a flexible budget, which allows for changes based on revenue. A fixed budget is developed based on historical data and can include provisions for transferring funds if income is insufficient. The data recorded during the period will impact the next fixed budget.
Fixed budgets are budgets that are written based on specific criteria and do not allow for any changes or variances in activity at any time during the time period covered by those budgets. For businesses, this means that a fixed budget is drawn up for a calendar or operating year, and does not change at any time during that year, even if changes in the level of business activity take place. This is true whether the company experiences a surge in profits or a drop in sales.
The fixed budget is a different budgeting approach than a variable or flexible budget. With a flexible budget, there are provisions to review specific line items, based on the level of revenue generated during the course of the year. In contrast, a fixed budget is carefully designed to stay in place for the entire quoted period. This approach helps ensure that each department within the organization always knows exactly how much they have to spend at the start of the period and how much is left at any given point during the budget period.
One of the benefits of a fixed budget is that each section of the document is developed based on historical data and the current financial status of the entity. It is not unusual for the budget itself to include provisions for transferring funds from savings or other types of financial holdings in the event that income proves insufficient to cover all items within the budget. For example, a religious denomination may write an operating budget based on the amount of donations received in the previous period. That same budget will include provisions to transfer money from some type of contingency account in the event that donations for the budget period are less than projected. This approach helps improve the chances of enjoying a balanced budget, regardless of the activity that takes place during the period.
It is important to note that even though a fixed budget does not change during the course of the calendar year, the data that is recorded during that period will have a direct impact on how the fixed budget for the next period is developed. If sales increase substantially during the previous budget period, there’s a good chance the next budget will reflect that increase in sales, and therefore you’ll be less dependent on savings and similar assets to balance the budget. At the same time, if sales decline during the period, the fixed budget for the next year will take these data into account and possibly rely more on savings to cover the next budget.
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