The preparation of a budget is essential for any business that wishes to keep its costs under control. Budgets also assist firms in planning business ventures, coordinating business activities and communicating information to the company’s stakeholders. Fixed budgets and flexible budgets are different from each other in terms of the complexity in preparation, and business scenario that is mostly suited for each. Since many find it difficult to distinguish them, this article attempts to explain these two budgets by clearly showing their differentiating features and what type of businesses find these budgets appropriate.
What is flexible budget?
Flexible budgets are, as their names suggest variable and flexible depending on the variability in the results expected in the future. Such budgets are most useful for businesses that operate in an ever changing business environment, and have the need to prepare budgets that are able to reflect the many outcomes that are possible. The use of a flexible budget ensures that a firm is prepared to some extent to deal with the unexpected turn around in events, and able to better guard itself against losses arising from such scenarios. A possible disadvantage of this form of budgeting is known to be the fact that they may be complicated to prepare, especially when the scenarios being considered are numerous in number, and complex in nature.
What is fixed budget?
Fixed budgets are used in situations where the future income and expenditure can be known, with a higher degree of certainty, and have been quite predictable over time. These types of budgets are commonly used by organisations that do not expect much variability in the business or economic environment. Fixed budgets are simpler to prepare and less complicated. In addition, keeping track is easier with fixed budgets, since the budget will not vary from time to time. One significant disadvantage of using a fixed budget is that it does not account for changes in expenditure and income over time. Thus, during times of unexpected economic changes the actual scenario may turn out to be different from what is laid out in a fixed budget.
What is the difference between Fixed Budget and Flexible Budget?
Fixed budgets and flexible budgets both are forms of budgeting that are essential for any business that wishes to exercise control, induce proper decision making and coordinate business activities. Fixed budgets are more suitable for businesses that operate in a less dynamic business environment, whereas flexible budget are best for firms that operate in a turbulent market. A fixed budget is much easier to prepare than a flexible budget since it does not require constant revision, whereas flexible budgets are much more complex since the scenarios considered are greater in number. The accuracy of a flexible budget can be easily affected owing to the variability of the business environment the firm is in. Flexible budgets are mostly preferred by firms because they allow the firm to conduct scenario planning and better adjust for unexpected situations.
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Fixed Budget vs Flexible Budget • Flexible budgets reflect the levels of business activity and output to be produced in line with the changes in the business environment, whereas flexible budgets are prepared on the assumption that the future of the business will not be much different from its past. • Flexible budgets allow the managers of the firm to be proactive to the changes that are being forecasted, which gives the firm a definite benefit in being able to protect itself through careful planning and preparation. • On the other hand, fixed budgets do not account for such changes and are too rigid to deal with the sudden changes in activity levels, which may adversely affect the firm. • Fixed budgets are less complicated to prepare in contrast to flexible budgets, which are much more complex, since they keep changing. However, in today’s ever changing environment the use of a flexible budget seems to be a safer bet than the use of a fixed budget since the future is quite unpredictable given the recent global economic conditions.
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