Static budget: everything you need to know

What's a static budget? How is it different from a flexible budget, or a fixed budget? And why would any company want a static budget?

There are plenty of questions about static budgets, and all of them are valid. In this article, you'll learn about static budgets, why they're used, who they're best for, why you might not want to use one, and how to create one yourself.

Keep reading.

What is a static budget?

A static budget is a budget that doesn't change. It's static, not dynamic or flexible—the budget is set and remains. A static budget is a fixed budget.

Of course, that doesn't mean the static budget is the kind of thing you can create, announce, and forget about. Companies will consistently refer back to their static budget, even if there's variance in their actual spending.

What does "static" mean?

The "static" part of "static budget" means immutable, or at least not elastic. A static budget is not designed to be modified during the period which is outlined.

In that sense, a static budget can be seen as an ideal or Goldilocks budget to strive for. Variance is expected, but corrections in the real budget should aim to return to equilibrium that the static budget outlines.

Static budget example

Say a company sets aside $50,000 in advertising spend for a given duration. It's up to the campaign manager to adhere to that budget—and to produce the expected ROI attributed to that ad spend. This is regardless of how that ad spend turns out in reality.

Static budget vs. flexible budget

All budgets are prescriptive. But while a static budget isn't living, a flexible budget is.

In other words, a flexible budget has built-in allowances and scenarios for fluctuations in revenue and spending. But a static budget doesn't.

What is the objective of a static budget?

The static budget's objective is to maintain a company's finances with minimal interference. It's the financial representation of a strategic plan, a blueprint or a roadmap to achieving whatever goal the company has.

Static budget variance formula

Static budget variance—the representation of the deviation from the static budget—is easy to calculate: subtract the actual spend from the planned budget for each line item over the given time period.

If you want to represent this number as a percentage, divide the difference by the original budget.

Here's the formula:
Static budget variance percentage = (Planned budget - Actual spend) / Planned budget

Benefits of a static budget

There are plenty of reasons why a company might want to use a static budget.

Predictability

Static budgets are predictable and minimize uncertainty. No matter what happens during the year, the static budget is a place to return to. While variance during the year is inevitable, companies can use the plan and proportions outlined in the static budget to stay on target, even as their real numbers are higher or lower than what was originally prescribed.

Cost management

Because the static budget has no allowances for spend variations, it's an effective cost management tool.

And for the finance team, it doubles as helping save them time—and thus costs—by putting the burden of adherence on the budget owner. If you've budgeted $10,000 per month for customer success software, then it's up to that budget owner to adhere to that. If they don't, you have veto power.

Measurable

Because static budgets are the same from the beginning of the period to the end, they make great bases to measure a company's results. As there's no variance introduced mid-way to confound the measurement process, calculating static budget variance is simple.

Limitations of a static budget

That said, static budgets have some real limitations and drawbacks.

Requires accurate forecasting

In order for a static budget to make sense, companies need to be skilled forecasters. Newer companies or companies with riskier or more aggressive growth goals might be better served by a flexible budget, which lets them create allowances for the inevitable variations that will pop up.

Inflexible to respond to changing needs and market conditions

Since the static budget is inflexible by design, there's a risk of it becoming quickly defunct or responding poorly to the changing needs of the company as determined by external factors like market conditions.

Likewise, if a company finds it doesn't hit its plan, the entire static budget fails.

Not suited for companies with variable costs

The static budget is best for companies with easy-to-predict short-term costs and expenses. A company that experiences seasonality, or a company that anticipates an event to provide an unknown influx of business, isn't well-suited to employ a static budget and would be better served with either a shorter budgeting cycle or a flexible budget.

Measure the efficacy of a static budget with static budget variance and sales volume variance

How well is the company adhering to the static budget? You can measure that with two handy metrics: static budget variance and sales volume variance.

Static budget variance

Static budget variance is the deviation from the static budget in either raw dollar amounts or as a percentage.

Companies calculate the static budget variance to see how closely they adhered to the static budget. This variance is useful to know when creating the next year's budget, as it allows companies to refine their models and be more accurate next time.

Static budget variance formula

Static budget variance = Planned budget - Actual spend

If you want a percentage, then divide by the planned budget.

Static budget variance percentage = (Planned budget - Actual spend) / Planned budget

Sales volume variance

Sales volume variance is the difference between actual units sold from the budgeted units sold at a given price within a given period.

It's a static budget variance that only looks at sales volume. As such, it's helpful to specifically address a point of budgetary deviance.

Sales volume variance formula

The formula is simple.
Sales volume variance = (Actual units sold - Budgeted units sold) x Price per unit

If you want this number as a percentage, divide by the budgeted units sold and don't multiply by price.
Sales volume variance percentage = [(Actual units sold - Budgeted units sold) / Budgeted units sold]

7 steps to create a static budget

Now that you know all about static budgets, one question remains: what are the steps involved in actually creating one?

1. Define the budgeting period and process

First, you want to identify your budgeting period. It's common for companies to budget for the entire fiscal year; however, many companies that use static budgets benefit from shorter budgeting periods. You should select what you feel is best based on your organization's complexity and any known periods of variance.

2. Estimate revenue

Next, you're going to estimate your revenue. You should use historical data for this step, combined with any forecasts or projections you have on hard.

You'll return to this step a couple times, so it's best to pick a couple different revenue numbers to begin with—one that's ideal, one that's discounted 5-20% depending on your growth stage, and one that's 5-20% better than you expect to land.

3. Estimate fixed and variable costs

Then it's time to estimate your fixed and variable costs. You should know your fixed costs and you should be able to identify your variable costs, so the majority of this step comes from guessing at the amount of those variable costs.

4. Estimate net income

From there, you can estimate your net income by subtracting out your costs from your revenue.

You can also calculate ideal EBIT and EBITDA during this step, too.

5. Allocate your budget

Now comes the difficult step: allocating your funds to the different needs of the business. You can use any budgeting method for this—activity-based, zero-based, incremental, value-proposition, or something else entirely.

Since this is a static budget, you should be doubly confident in your allocations. It's worth going slow on this step, asking questions of budget owners, and making sure that you understand everybody's requirements.

6. Review and adjust the budget

Then comes a budget review, where you make any final adjustments to the budget based on feedback from stakeholders.

And then you've finalized your static budget! There's nothing left to do except share it with stakeholders across the business.

7. Monitor and review budget performance

Of course, the budgeting process isn't over until the budget has run its course. During the period outlined in your static budget, you should monitor and review the company's expenses and revenue and calculate where the variances exist.

This will help you create a more accurate budget during the next budgeting cycle.

Conclusion: Create a static budget with Prophix

Now you know all about how to create a static budget. And if you're interested in turning this into action, Prophix can help.

Prophix makes it easy to leave disconnected spreadsheets and broken formulas behind. With Prophix, real-time collaboration meets automated efficiency so you can keep your team engaged and aligned with a streamlined financial planning process.

Check out a demo to see Prophix in action.