A fixed budget is a type of budget that does not allow for changes within the budget’s period of coverage. When a fixed budget is drawn up, the specific needs and availability of resources are taken into consideration. These considerations determine how much is allocated for which. As the year (or budget period) goes by, the initial numbers cannot be changed for a fixed budget even if there is a change in the financial status of business.
Often, a fixed budget is discussed in contrast to a variable or flexible budget. With the latter type of budget, specific items in the budget can be revised within its coverage. The revisions will depend on the inflow of cash within the covered period. If, for example, the business earns more within the first few months, then the specified items in a variable budget can be increased.
Why are fixed budgets used when they seem to be so restrictive? Fixed budgets are actually very useful for businesses that have a high degree of control over their expenses in the course of their operations. Utilizing fixed budgets make things even more predictable, and managers are able to track the status of their projects and spending more closely with a fixed budget.
It is important to realize, however, that fixed budgets do not work for everyone. As a matter of fact, businesses which have a high number of variable costs will not benefit from a fixed budget. Even if they predict expenditure and income, the variability of their operations will render the fixed budget useless.