Fixed budget and flexible budget are the terms used in the context of budgeting a fixed budget is a budgeting method in which the financial plan of the company remains unchanged throughout a specified period which is usually a fiscal year while a flexible budget is a financial plan which can be changed based on changes in sales volume, market conditions, government policies, competitors actions or other external factors. In order to get a better understanding of both terms one should look at some of the differences between fixed budget and flexible budget –
Fixed Budget Vs Flexible Budget
Understand like a 10 Year Old
If you have to explain a fixed budget to a 10-year-old then a fixed budget is like a plan that your parents make at the beginning of the year for how much money they want to spend on things like groceries, bills, and fun activities for the family. Once they make the plan, they can’t change it, even if something unexpected happens, like the price of things going up, or some emergencies happening. Hence in simple words, your parents will have to stick to the plan at any cost. While a flexible budget is like a plan that your parents make that can change as they go along. For example, they might plan to spend a certain amount of money on groceries, but if one day they become adamant to go to some expensive restaurant or movie, they can adjust the plan and spend a little less on something else to make up for it. Hence in simple words, your parents can alter the plan according to evolving situations.
Flexibility
In the case of a fixed budget, there is no scope for flexibility in the sense that a fixed budget may become irrelevant over time as market conditions change while a flexible budget as the name suggests is flexible and can be modified according to changing conditions thus flexible budget remains relevant even when market conditions are evolving. In simple words, a flexible budget is more dynamic in nature than compared to a fixed budget.
Simplicity and Complexity
A fixed budget is simple to understand and make in the sense that it is based on historical data and fixed targets. The focus is on setting targets for the upcoming period based on past experience as well as past data without taking into account any changes in the business environment that may occur during the period while a flexible budget is more complex to prepare and manage than a fixed budget, as it requires more detailed analysis and takes into account changes in sales volume, market conditions, and other external factors apart from past data and past experience.
Allocation of Resources
A fixed budget allocates a specified amount of resources for a predetermined duration of time, often a fiscal year, to particular activities or projects which do not change even when market conditions or external factors change while in the case of a flexible budget, there is a scope for adjustments in resource allocation based on changes in sales volume, market conditions, or other external factors so as to ensure that resources are allocated on the basis of actual requirements and not on the basis of a predetermined plan.
Controlling
As far as controlling expenses is concerned fixed budget does a great job in the sense that it does not allow the budget to exceed predetermined limits even at the cost of being static in nature and not allowing for any change in the budget due to change in market dynamics while the flexible budget has less control because it has to be changed according to market dynamics and when changes are made the actual costs are bound to get exceeded than budgeted.
As one can see from the above that both fixed budget and flexible budget are two different budgeting approaches used by organizations to control and manage their expenses hence any company thinking of adopting any of the above budgeting methods should carefully read the above differences and then only should take any decision regarding which budget method is best suited for the company.