Fixed budgets are budgets that are drafted on the basis of specific criteria, and do not allow any room for any changes or variations in activity at any point during the period of time covered by those budgets. For businesses, this means that a fixed budget is drafted for a calendar or operational year, and is not amended at any time during that year, even if there are changes in the level of business activity that take place. This is true whether the company experiences a sudden increase in profits or a slump in sales.
The fixed budget is a different budgeting approach than a variable or flexible budget. With a flexible budget, there are provisions for revising specific line items, based on the level of revenue generated during the course of the year. In contrast, a fixed budget is carefully crafted to remain in place for the entire period cited. This approach helps to ensure that each department within the organization always knows exactly how much they have to spend at the beginning of the period and how much is remaining at any given point during the budgetary period.
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One of the benefits of a fixed budget is that each section of the document is developed based on historical data and the current financial status of the entity. It is not unusual for the budget itself to include provisions for transferring funds from savings or other types of financial holdings in the event that income proves insufficient to cover all line items within the budget. For example, a religious denomination may draft an operating budget that is based on the amount of donations received in the previous period. That same budget will include provisions for transferring money from some type of contingency account in the event that donations for the budget period prove to be less than those projected. This approach helps to improve the chances of enjoying a balanced budget, regardless of what activity takes place during the period.
It is important to note that even though a fixed budget does not change during the course of the calendar year, the data that is recorded during that period will have a direct impact on how the fixed budget is drafted for the next period. If sales increase substantially during the previous budgetary period, there is a good chance that the upcoming budget will reflect that increase in sales and thus rely less on savings and similar assets to balance the budget. At the same time, if sales decrease during the period, the fixed budget for the next year will take this data into consideration, and possibly rely more on savings to cover the upcoming budget.