Static Budgeting 101: A Beginner’s Guide
Budgets act as a financial blueprint and the backbone of a company. Having a clear understanding of your overall expenses and revenues serves as a wellness check for your business.
However, budgets aren’t a “one size fits all solution.”
The right budget means something different for every business. When choosing a budget model, considerations should be taken for any financial restrictions that your company might have, long term goals that your company hopes to achieve, and both time and resources available to work on the budget.
There are five types of budget models, as discussed in an earlier blog, but our goal here is to focus on just one.
Read on for a deep dive into the world of static budgets.
Table of contents:
- What is a static budget?
- How does static budgeting work?
- When should you use a static budget?
- Pros and cons of static budgeting
What is a Static Budget?
The name says it all!
A static budget doesn’t change for any reason during its complete life cycle. Once it is created, this budget remains – well – static!
External factors, such as your company’s success throughout the year, have no effect on a static budget.
Similar to zero-based budgets, static budgets are created based on desired results and outcomes of your company or department rather than routinely inflating the previous budget by a set percentage.
Static budgets use the previous year’s budget as a starting point, and then take into account any variances in order to understand where your budget can be fine-tuned on the micro level, while still keeping the macro focus on meeting long-term goals. Companies calculate the assumed cost of achieving a desired outcome, and relay those costs as a line item in their static budget.
Let’s say the marketing department wants to reach more people in a geographic location through targeted advertising which they figure to cost between $1,000-2,000 a month. That $2,000 is added to the budget for the year and does not change regardless of the ad campaign’s performance.
This can be incredibly helpful, but it can also be inaccurate and lead to a misunderstanding of success. If the campaign fails, is it due to a lack of funding? Could a few extra dollars have tipped the scale? Or was there enough funding but the ads themselves fell short? With a static budget, you lose the opportunity for trial and error in real time.
That being said, static budgets are a great way to keep your company laser focused on your finances and prevent overspending or unnecessary spending.
While a static budget might not be the best solution for all startups, there are situations when it can still be an optimal choice. For example, A static budget might be the ideal solution for certain departments within your company with more predictable spending habits.
How Does a Static Budget Work?
To recap, a static budget is created with a focus on the projected costs and the anticipated revenue of your company, and its goals, over the course of a year.
This budget uses numbers from the previous year as a starting point and builds off of them based on findings, variances, and new goals. As we mentioned previously, a static budget remains unchanged throughout its entire lifecycle regardless of external factors, such as company performance.
To put this in perspective, if you project that your sales team will bring in a certain amount of revenue during one budget cycle, the associated expenses to achieve this goal are written into the static budget as a line item.
If the sales team exceeds this projection, the budget does not get changed to reflect that – the sales team doesn’t get additional funds for added resources even though they crushed their sales goal.
Conversely – if the sales team misses the mark completely, they still get to keep the allocated funds for their resources, but the budget variance at the end of the cycle will most likely stimulate a change for the following year.
Again, without the opportunity for real-time testing, it can’t be determined if money is the sole factor in sales not making their quota.
Static budgets tend to force you into a box – you’re stuck based on a decision that you made at the start of a cycle without knowing definitively what the year ahead might bring.
Using the sales team as another example, a static budget requires a set numerical threshold for commission funds regardless of performance, unlike other budget models which set a percentage for the commission rate.
Can you imagine trying to rally your sales team to slay their goals when they know it really doesn’t have any effect on commission?
You can see now why a static budget might not be the best approach for every company and every department.
So who does this budget model work for? Let’s explore that in more detail.
When Is a Static Budget Useful?
Businesses or departments with highly-predictable finances can benefit from a static budget model.
HR might be a good candidate as their main focus is not to bring in large amounts of revenue, and their expenses typically don’t fluctuate. Accounting departments also could use a static budget to plan for their year since they have a fairly patterned spending vs. earning model.
Also, startups who are awarded grant money or other federal funding often find a static budget model the ideal solution since their spend is constrained by their grant amount.
What Are the Pros and Cons of the Static Budget Model?
As we mentioned before, a budget model choice is highly individualized and doesn’t adhere to the “one size fits all” approach.
Make your decision carefully and consider the benefits and drawbacks of each for your company or department.
Here’s a quick list of pros and cons for the static budget model to determine if this is the right type of budget for you.
Static Budget Model Pros:
- A static budget ensures you will be more conscious about your spending decisions since you won’t be able to make changes for a full cycle or year.
- A static budget eliminates the option for overspending based on the same reasoning as above.
- Maintenance and upkeep are a breeze – this budget truly is the “set it and forget it” of budgets (at least for a year).
- This budget ensures that you will have the appropriate cash on hand for allocated expenses regardless of external factors.
- It offers a detailed granular review of your financial health and growth year over year.
Static Budget Model Cons:
- Growth may be affected by a static budget since you are not actively changing as you go based on performance. The financial restraints may result in missed opportunities.
- Static budgets are rigid and only work for certain departments or companies. This budget may not be flexible enough for your startup especially if you are in the early stages of your business.
- Inaccurate planning can cause major problems especially when your goals are directly tied to the predetermined amount that you budgeted at the start of the year.
- If you employ any help other than full-time, year-round staff, using a static budget is not the best solution. You need flexibility for seasonal and temporary workers.
- Static budgets tend to be more work than other models to develop every year.
Forecast Your Budget with Finmark
No matter what budget you choose, you need to have a sound financial foundation.
That’s where Finmark comes in.
Finmark is everything you need to build an accurate, customized financial model, including:
- Create, update and share your financial plans
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- Forecast your revenue and expenses
- Get prepared for fundraising
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This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.