There are several reasons why companies prefer to use static budgets:
Since a fixed budget is for the entire period cited, say, for one year, it is a budget that is easy to prepare but carefully crafted to remain in place. This will ensure that all departments of the organization are always familiar with how much they have to spend at the beginning of the period and how much is remaining at any given point during the budgetary period. Problems arise if there are emergencies or new opportunities which need budgets. In my work as an auditor, every time my company needs to start a new project that was not earlier included in the budget, managers spend nights to study how they can go on with it without being warned of not following policies. Management always has the excuse of doing it constantly for practical reasons. They borrow funds from restrictions. But this is not supposed to be. I just told them, this might be all right if only a few areas will be affected.
Static budget is based on historical data and the current financial status of the entity. A budget committee will only have to look into the previous budget and set some changes--either increase or decrease the accounts. It is not unusual for the budget itself to include provisions for transferring funds from savings or other types of financial holdings in the event that income proves insufficient to cover all the line items within the budget. In the company that I serve as an auditor, this is happening at branches. They cope with finances until the time that they become self-liquidating. The main office usually extends help in order for them to survive.
For a company that utilizes this method, it is useful if it has reasonable control over any possible expenses and management can forecast with some degree of accuracy wherein potential costs may be computed accurately for a given period. Management will only have to be watchful of some variables to be inserted into the budget proposal like planned renovation costs for a building which the company does not have any previous experience. In cases like these, consultations must be made first with experts before inserting the intended budget figures into the master budget.
A company that has limited capacities will have the tendency to be attached to this method because it has no allowances for possible changes in its budgetary needs. However, sticking to this kind of method doesn’t have much success when the company has too many variables in its future expenses that can’t be predicted. In such cases any type of fixed budget would not serve as a realistic fiscal plan for that given company for its operating purposes.
Preparing a static budget does not account for inflation and a rise in costs. It won’t go as far as the previous years. It does not have any flexibility to deal with change in the environment, emergencies, personnel, or competitive pressures. The worst is that if competitors are aware of it, they might outspend the company.
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