A static budget remains fixed despite changes in sales volume or expenses, and helps organizations avoid overspending. Departments must maximize their use of the allocated funds, and set specific criteria for expenses. This budgeting tool can also be applied to households.
A static budget is a budget that stays in place, even when changes in sales volume, expenses, or other relevant factors change. It is not unusual for the parent or parent budget of a corporation or other type of organization to be structured as a static budget plan, while the budgets associated with individual departments are somewhat more fluid and influenced by changes in sales volume and Expenses. As a budgeting tool, the use of this model helps ensure that the organization does not spend more resources than it has available, assuming that the plan to meet the budget allows for potential drops in sales revenue by transferring funds from contingencies and other accounts.
With a static budget that is applicable to an entire organization, each department or group within that organization is given a maximum amount of funds to work with throughout the operating year. At the department level, the goal is to find ways to maximize the use of that revenue, getting the most benefit while spending the least amount of the static budget allocation. This often involves setting specific criteria for how funds should be used for various expenses, including commissions, administrative costs, and other essentials.
For example, if the static budget for a company allocates $1 million USD for commission payments to the sales department, that department will be responsible for creating some sort of guidelines for how commissions are paid. Depending on the structure of the business, a simple tier approach may work well. To issue the full $1 million in commissions for the entire operating year, sales volume may have to be between $19 million and $20 million. If the total sales volume is in the $15 million dollar range, then the department only issues $750,000 total commissions. With this type of approach, the department has some flexibility in managing its expenses, while staying within the budget constraints set by the master static budget. As long as the variance in sales volume is such that actual sales do not exceed $20 million, there is no need to find ways to move funds from one budget line to another to pay commissions, and the static budget remains intact.
The concept of a static budget is not limited to use in businesses and other large organizations. Households can also apply the general idea as a means of preventing expenses from exceeding income. By planning carefully, it is possible to set a budget that allows a maximum amount of funds to be allocated to each line item, provided there is no obligation to actually spend the allocated amount. This creates a situation where there is a static budget balance, where the actual expenses incurred for the period are less than the maximum amounts allowed for one or more budget items. When this type of variance occurs, households may choose to carry over unspent resources to the next budget period, transfer resources to an interest-bearing account, or use excess funds for some type of off-budget purchase. In either case, the home operates on a balanced budget, which is the ultimate goal.
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