- Key Advantages & Disadvantages of Using a Static Budget
- Negative Variance With Budgeting
- A Comparison of the Advantages of a Flexible Budget & a Static Budget
- How to Calculate Financial Variance When Budgeting for a Loss
- Elements of the Budgeting Cycle
- Zero Based Budgeting and How Does It Differ From Traditional Budgeting
A static budget uses anticipated activity in its estimations, and doesn't change during the period of time the budget covers, regardless of what actually happens. Actual activity, also called actuals, doesn't affect the budget, even if the actuals vary greatly from what was originally expected. Finance managers spend a great deal of time examining the differences between the static budget and the actuals, and this is called variance analysis. Calculating the variance, and the percentage variance from budget, is easy; however, understanding the reasons behind the variance is more complex.
Subtract the actual data from the static budget to calculate the variance. For example, if you budgeted $100,000 in sales but you only achieved $90,000, your budget variance is $10,000. If you have a breakdown of budget line items, you can calculate each item's variance. This is best accomplished on a spreadsheet, where multiple calculations can be performed simultaneously and automatically.
Divide the result from Step 1 by the budget to calculate the percentage variance from budget. For example, dividing $10,000 by $100,000 is 10 percent; sales of $90,000 are 10 percent shy of budget. Depending on preference, you can alter the formula to show shortfalls as negative percentages. Alternatively, you can program the spreadsheet to show in red ink numbers that are below expectations, which is commonly called in the red. Positive numbers are in the black.
Analyze the results from Step 1 and Step 2 to draw conclusions about the forecast. Numbers that are significantly above or below expectations must be examined. Businesses use variance analyses to try to make more accurate predictions of future activity. The revised expectations are shown in the forecast. Whether developing a budget or a forecast, the goal is accuracy. After the forecast is developed, actuals will be compared against both the budget and the forecast.
Be sure that you're making an "apples to apples" comparison. In other words, compare similar time periods and categories. For example, comparing January 2011 to August 2010 may not be appropriate; instead, compare it to January 2010.
Items you will need
- Original budget
- Spreadsheet program, or calculator
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