A static budget is a type of budget wherein values are determined at the onset and are not changed throughout the course of the budget period coverage. Even if the state of finances vary within that period, the static budget will not be changed. This is in contrast with a flexible budget wherein some values may be adjusted based on the performance of the company within the coverage period.
A static budget can be applied to both business enterprises and personal or household purposes. More so, a static budget can be applied to an entire business or to certain departments only.
Here is one example of how a static budget works. Let’s say that a small company sets aside USD 500,000 for a year for the commissions of the salesforce. For the entire year, it is up to the sales department to work out the details of the commissions given to the salespeople. The amount allocated for commissions will not change even if the sales go through the roof.
When creating static budgets, predictions are of prime importance. The history of the financial performance of company or department is examined thoroughly to determine patterns. This evaluation will result in the more or less accurate prediction of the flow of cash. The ideal situation is that the figures involved in a static budget is an accurate representation of the actual figures. However, in real life, discrepancies usually arise.
A static budget can also be applied to a household budget. In this case, it is simply the allocation of specific amounts to certain items. No matter what happens, the allocated amounts will not be increased - even if there is an unexpected inflow of cash.