Difference Between Fixed and Flexible Budget
|
Basis |
Fixed Budget |
Flexible Budget |
|---|---|---|
|
Definition |
It is a budget that stays the same, no matter how much a business’s activities change. |
It is a budget that adjusts according to the level of activity or other factors in the business. |
|
Ability to Change |
Fixed Budget stays the same all the time. |
Flexible Budget can change to match what’s actually happening in the business. |
|
When to Use? |
It is good for businesses that do the same amount of work all the time or need short-term plans. |
It is better for businesses where work can vary a lot. |
|
Purpose |
Mainly used to see how well the business is doing compared to the plan. |
It is mainly used to get a clearer picture of performance by looking at real activity levels. |
|
Benefits |
Fixed Budget makes planning and tracking easy and works well when things don’t change much. |
Flexible Budget is more accurate in showing how the business is doing and adapts to business changes. |
|
Challenges |
It might not reflect real business situations if things change. |
It needs a good understanding of how costs change with the business’s activities. |
|
Adjustment to Changes |
It does not adjust, which means it might not be accurate if business conditions change significantly. |
It automatically adjusts, ensuring relevance and accuracy regardless of changes in business conditions. |
|
Cost Management |
It encourages strict adherence to predetermined costs, which can limit responsiveness to unforeseen opportunities or challenges. |
It allows for dynamic cost management, adapting to operational realities and potentially optimizing expenses. |
|
Example |
A freelance writer who has no shortage of work and has regular monthly bills like a mortgage or rent, utilities, groceries and car payment can work with a fixed budget. |
A clothing store that sells the same merchandise all year long but has a big sales push during the Christmas seasons may work with a flexible budget to accommodate the need for more inventory and employees during those peak times. |
Difference between Fixed and Flexible Budget
A budget acts like a financial roadmap for a set time, usually a year, guiding both businesses and individuals on how to best allocate their money based on expected earnings and spending. Within the world of budgeting, two main kinds stand out: Fixed Budgets and Flexible Budgets. Each serves its unique role, coming with its own set of pros and cons, making it important to know their differences for smarter financial decisions. The choice between a fixed and a flexible budget depends on the nature of the business, the predictability of the operating environment, and the specific management objectives. Fixed Budgets are more suited to stable environments with consistent production levels and costs while, flexible budgets are better for businesses facing fluctuating demand, variable costs, and the need to adapt quickly to changing circumstances.
Table of Content
- What is Fixed Budget?
- What is Flexible Budget?
- Difference Between Fixed and Flexible Budget
- Fixed Budget and Flexible Budget – FAQs