This guide outlines how to build and use a static budget for your business.
There’s no doubt that a detailed and realistic budget can be one of the most important instruments for guiding your company’s financial decisions. A budget, in many ways, provides essential information for operating within your limits, dealing with unexpected obstacles, and generating a profit. Without one, you are simply playing a guessing game, and you could put your finances at unnecessary risk in the process.
However, according to a Clutch survey, more than half of small firms do not prepare an official, formally written budget, implying that some business owners regard budgets as an unnecessary framework. Another possible explanation for the lack of a budget is that some business owners may simply not have the expertise required to draft an effective budget, so they put it off and focus their efforts elsewhere.
If you belong to the latter group, you’ve come to the right place. We’re here to give you a quick breakdown of how to construct a static budget for your business, and you might be surprised to learn how simple it can be.
What is a static budget?
A static budget essentially functions as a forecast of your expected revenue and the expenses that you anticipate your business to incur over a predetermined period, typically a year.
As you might have guessed from the name, the term static implies that the budget remains unchanged throughout the set period, despite fluctuations in sales and production volumes. As a result, your business’s actual results can often vary considerably from the forecasts within your static budget.
Thus, these types of budgets are primarily used as a rough framework for planning financial input and output so you can better plan your investments and manage expenses accordingly.
For example, let’s say you have set a budget for $10,000 in annual marketing expenses. In that case, it would be up to your marketing department to stay within these bounds over the course of the year in order to adhere to the budget, regardless of how the actual expense fluctuates.
Conversely, a flexible budget is more adaptable since it uses percentages of revenue or expenses instead of fixed numbers like a static budget. However, these dynamic budgets are far more sophisticated in nature and require time and an experienced accountant to adjust the budget accordingly. That’s why today we are here to learn about preparing static budgets, so let’s get down to business.
How to build a static budget
Building out a rough working budget doesn’t have to be a big deal. While it can take several hours to compile all of the data you need, the process is relatively straightforward.
Calculate and examine your overall revenue
The first step in creating a static budget is to calculate and examine your expected revenue. The best way to do this is to look at your previous income records and use that as a template.
Of course, the longer you have been in business, the more accurate this information will be. It’s important to note that when you are calculating your income sources, you must only include your revenue and not profit. This is all of the money that enters your business before any expenses are accounted for. Once you have your revenue, calculate it into your monthly income.
Determine fixed costs
Next up are your expenses. Just as you did with your revenue, go back through your previous records and add up your fixed costs. In this case, fixed costs are expenses that stay the same each month, such as your rent, utilities, loan payments, etc.
Include variable expenses
You also need to include your variable costs in your budget. This includes expenses that may change each month depending on how you use the service. This could be things like salaries, bonuses, supplies, marketing, shipping, etc.
For now, it may be difficult to predict these costs, but you need to put an estimated monthly cost of each of these expenses for the sake of your static budget.
Set aside a contingency fund for unexpected costs
Alongside your fixed and variable costs, your business will likely incur unexpected costs during its operations. This could be for unplanned maintenance and repair, large one-time spending on equipment, or the replacement of inventory that has been damaged. Simply estimate your unexpected costs over a year, and divide the number by 12 to get your monthly budgeting allowance.
As the saying goes, fail to prepare, prepare to fail. In any case, having a contingency fund will help to give you peace of mind knowing that you are prepared for the worst.
Put your budget together
Now that you have all of your numbers, it’s time to finally put your budget together. In order to do this, simply subtract all three of your expenses (fixed, variable, and unexpected) from your revenue. If you get a positive number at the end of your calculations, congratulations, your business looks set to run in a profit.
However, if you find that your business is projected to run at a loss, you may want to reevaluate your expensesand see where you can cut down to minimize your spending.
The limitations of a static budget
Before we close, let’s quickly run over some of the limitations of a static budget. The first and most obvious disadvantage is the lack of flexibility. Since the budget remains fixed after it has been created, wild fluctuations in sales or expenses can render the budget obsolete, which means that you may have to start again from scratch. This can be an issue for rapidly expanding businesses and start-ups.
Furthermore, given that static budgets rely on historical data, they can be inaccurate, particularly for newer organizations with a limited pool of data. As a result, static budgets are often most effective for organizations with relatively predictable sales volume and costs, whereas companies with higher year-to-year variations, as previously indicated, may be better suited to choosing a flexible budget.
That all having been said, static budgets are still plenty useful, especially if you are used to “flying blind” without any budget at all. Follow the process above, and you’ll be in great shape to get started with smarter fiscal planning for your business.
