One of the most delicate subjects related to management is, without a doubt, money. In this sense, a budget is a fundamental instrument in the planning and control of your company’s activities that can also improve your decision making.
Among the available models of this tool, we have the dynamic budget and the static budget, which can be adjusted according to potential needs. To learn how they work and how to prepare them, keep reading this post!
The concept of a dynamic budget
A dynamic budget — or flexible budget as it is also known — analyzes variable costs in a more flexible manner. In other words, budget resources are not fixed based on a predetermined estimate and can be adjusted if the real volume of activity changes compared to the estimate.
Concept of static budget
The most used and known type of budget control is the one that cannot be modified after its official version is prepared and approved by company managers, precisely because it is a static format.
To do it, the company uses predetermined sales or service estimates for the period to which it refers. Once this volume is fixed, no change is allowed, even if during the performance of the activities there is some variation in demand, productivity or results.
Then, the values and indicators are divided among the different needs of the organization, such as sectors and their processes and investments.
After that, even if there are unforeseen events or any situation that makes the numbers exceed the budget, it is not modified. Thus, deviations between realized and planned numbers are identified at the time of analysis.
Advantages and disadvantages of a dynamic budget
- Through flexibility, it’s possible to adjust forecasts at any time;
- It’s considered very dynamic, because it shows the relationship between costs and volume in the short term, given that the estimates for expenses for any volume or rhythm of activity can be calculated quickly;
- It’s possible to take advantage of good moments in the market to maximize profits and increase sales in a more dramatic and rapid fashion;
- It’s also possible to protect yourself from the bad phases of the market, minimizing losses and reacting to crises in a more efficient manner;
- Budget items have greater relevance when there are changes in the scenario;
- Demonstrates the real deviation from the budget and offers managers a broad vision of their business;
- Smaller companies can apply it with greater ease, because the departments are smaller and they are more agile in changing direction.
- Continual monitoring of changes in the business environment;
- Constant monitoring of the organization’s levels of activity;
- The permitted adjustments require that managers be willing to adapt to constant changes;
- The budget can be considered complex when it’s implemented.
Advantages and disadvantages of the static budget
- Easy and fast monitoring: it is not necessary to monitor it as constantly as the dynamic budget; budget revisions are also not needed;
- Greater financial control: as it is not possible to increase the availability of funds for any sector or process, it is more difficult for professionals and managers to spend more without a thorough analysis;
- Better identification of deviations: the impossibility of changing availabilities also makes the verification of deviations easier, as any realized amount that is above the planned will soon be identified.
- Possibility of disrupting the business: it is possible that the set limits end up restraining actions and investments that would help the company’s growth, precisely so that they are not exceeded;
- Possible misuse of money: for example, for a particular item, the targeted availability may generate surplus cash, while another sector or process may need more funds. As it is not possible to reduce availability to one side and increase to another, the whole may not be well spent or invested, considering the specific needs.
Preparing a dynamic budget
To prepare a dynamic budget, you need to have a master budget already prepared and understand the behavior of your costs — this signifies making a perfect distinction between fixed, variable and semi-variable costs.
You also need to identify the real volume of the items produced and sold and have to make an estimate of your planned revenues to determine how much money you’ll need on hand.
Later you should compare this budget to your previous expenses, costs and revenues to determine the relevance of your dynamic budget. In addition, you need to reevaluate it periodically.
A practical example
Company WYZ wants to prepare a dynamic budget to make monthly comparisons between its real and budgetary values. The organization is projecting the following costs:
|Variable Costs $||Fixed Costs/Month $|
It wants to project its costs for various levels of activity, reaching initial volumes of 9,000 and 11,000 units/month for products A and B.
|Total Variable Costs||30,600.00||37,400.00||68,000.00|
|Total Fixed Costs||31,000.00||9,000.00||11,000.00||20,000.00|
Preparation of the static budget
To prepare a static budget, it is necessary to follow the same steps of the elaboration of the dynamic budget, but without determining the different levels of activities.
Therefore, the company checks what its availabilities are and what the results of the last completed budget were. After that, the revenue forecast is established, including variable fixed costs and other potential additional expenses.
Other budget types
As the name suggests, the basis for this type of budget is zero for both turnover and revenue. From this, the forecasts are made and indicators and limits are established.
One of the main advantages of zero-based budgeting is that it prevents past mistakes from continuing, because, in its preparation, every point of the business is reviewed.
In fact, it is not possible to count on the historical availabilities to increase it. Therefore, it is also a good additional control tool when using the static or dynamic budget.
In this format, expense groups are created and managers for each of them are set. For example, it is possible to have groups of:
- marketing and sales;
- purchasing and logistics;
- administrative routines;
- personnel department and Human Resources.
The main positive aspect of the matrix budget is its ability to maintain a more strategic funds management. For example, when creating a marketing and sales group, the manager of this spending package can change the availability for each part, within the whole intended for the group, to extract the best possible result from the overall value of its matrix.
A well-planned budget can make the organization’s operation much easier – even with a certain degree of complexity, it is a great tool for the success of the budget process.
But before that, it takes a lot of analysis to understand which kind of control is better for the company in question and whether another type of additional budget is needed to have more strategic and reliable management.
Now that you already know how the static budget, the dynamic budget and other options work, learn how artificial intelligence applied to finances can help the management of the company and its numbers, as well as provide more security to operations.