A fixed budget sets a line that a company or business cannot cross, making it easier to save money or avoid overspending.
A fixed budget is a financial document that remains the same throughout a financial period, regardless of any unexpected and spontaneous events that may occur. Flexible or variable budgets, on the other hand, change from time to time based on changes in expenses. The benefits of a fixed budget include greater stability, better savings, and easier future planning, while the disadvantages include reduced flexibility.
A fixed budget does not allow any room for extra and unpredictable monetary needs.
Possibly the biggest downside of fixed budgeting is that it does not allow an individual or business owner to adjust the budget based on a change in the situation, such as the loss of a job or reduced profits. This makes it especially difficult to react to the kind of unexpected changes that normally occur in the business world, as well as life in general. For this reason, most large conglomerates prefer flexible budgets to fixed budgets.
A fixed budget allows for future planning.
Small business owners often prefer fixed budgets, however, because they provide a much greater level of stability and spending control. Fixed budgeting involves setting a ceiling on spending, which means that the individual or business owner cannot spend beyond that point. This is beneficial because it prevents someone from overspending on a whim. If a person suddenly received a bonus, for example, he would not be allowed to spend anything if he had already exceeded his spending limit.
Someone on a fixed budget might be tempted to use deferred credit cards for extra purchases.
Another benefit of a fixed budget is that it would force the person to direct that bonus to their savings account. With a flexible budget, he could decide to allocate it to a spontaneous purchase, such as a high-definition television or laptop. He must, in effect, wait until the next fiscal year, at which time he can adjust the budget by increasing the amount of discretionary spending allowed.
Someone on a fixed budget may have to eliminate social outings with friends.
The biggest benefit to more controlled spending and improved savings that result from a fixed budget is greater planning ahead. That extra money put into savings can become extremely important if an accident occurs. Or the person may get married, have a child, and then suddenly realize that he and his wife need to establish a college fund.
A fixed budget is an ideal choice for small business owners and individuals. It provides a level of stability and control that cannot be found on a flexible budget. The problem with fixed budgeting, however, is that it doesn’t work well in the business world, where the market is constantly fluctuating.