You will find a static budget is most effective in evaluating a manager's effectiveness in the following situation:
• When profits are consistent each financial year
If the business is stable and they have standard profit margins then this would be an ideal situation for a static budget to be used. A static budget can be implemented due to the business being able to predict fairly accurately what their in-comings are likely to be. Therefore the outgoings and expenditure can be fixed to coincide with this figure.
This would make it easy to see how well the manger is performing for the year. As if the profits increase then they are obviously very effective at their job as they have improved figures without increasing the budget. Whereas if profits stayed the same again or even dropped then the manager's performance and effectiveness would be brought into question.
If it was a business that was based on trade only, certain times of the year are dependent on factors such as nice weather then it would be hard to implement a static budget. This is because you would always need to have a contingency plan in case trade increased and so you need to put more into stock or staff costs or if the weather was so awful that trade was near non-existent then again the budget would be tweaked.
This would of course make it harder to judge the effectiveness of the manager; especially if a lot of the custom is down to something uncontrollable like the weather.
• When profits are consistent each financial year
If the business is stable and they have standard profit margins then this would be an ideal situation for a static budget to be used. A static budget can be implemented due to the business being able to predict fairly accurately what their in-comings are likely to be. Therefore the outgoings and expenditure can be fixed to coincide with this figure.
This would make it easy to see how well the manger is performing for the year. As if the profits increase then they are obviously very effective at their job as they have improved figures without increasing the budget. Whereas if profits stayed the same again or even dropped then the manager's performance and effectiveness would be brought into question.
If it was a business that was based on trade only, certain times of the year are dependent on factors such as nice weather then it would be hard to implement a static budget. This is because you would always need to have a contingency plan in case trade increased and so you need to put more into stock or staff costs or if the weather was so awful that trade was near non-existent then again the budget would be tweaked.
This would of course make it harder to judge the effectiveness of the manager; especially if a lot of the custom is down to something uncontrollable like the weather.
