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A fixed budget is a financial document that remains the same throughout a financial period, regardless of any unexpected and spontaneous events that may transpire. Flexible or variable budgets, on the other hand, change from time to time based on changes in expenditures. The benefits to a fixed budget include greater stability, better savings, and easier future planning, while the disadvantages include reduced flexibility.
Possibly the biggest drawback to fixed budgeting is that it does not allow an individual or business owner to adjust the budget based on a change in situation, such as the loss of a job or reduced profits. This makes it especially hard to react to the type of unexpected changes that typically occur in the business world, as well as life in general. For this reason, most large conglomerates prefer flexible budgeting to fixed budgeting.
Small business owners typically prefer fixed budgets, however, because they provide a much greater level of stability and spending control. Fixed budgeting entails establishing a maximum spending limit, meaning that the individual or business owner may not spend past this point. This is beneficial because it prevents one from overspending on a whim. If a person were to suddenly receive a bonus, for instance, he wouldn’t be allowed to spend any of it if he already went over his spending limit.
Another benefit to a fixed budget is that it would force a person to direct that bonus into his savings account. With a flexible budget, he could decide to allocate it toward a spontaneous purchase, such as a high-definition television or laptop. He must in fact wait until the next fiscal year, at which point he can adjust the budget by increasing the allowed amount of discretionary spending.
The largest benefit to the more controlled spending and improved savings that result from a fixed budget is greater future planning. That extra money put away into savings could become extremely important if an accident were to occur. Or the person may marry, have a child, and suddenly realize that he and his wife need to establish a college fund.
A fixed budget is an optimal choice for small business owners and individuals. It provides a level of stability and control that cannot be found in a flexible budget. The problem with fixed budgeting, though, is that it doesn’t function well in the business world, where the market is constantly fluctuating.