By: Alia Nikolakopulos
A static budget is a forecast of revenue you expect your business to earn and the expense you expect your business to incur to produce the products and services you sell. Static budgets provide a focal point for businesses and allow managers and key employees to easily determine if production and sales are over or under budget without waiting until the end of a period. This allows time for sales adjustments when performance is low.
1.) Estimate your revenue. Multiply the number of units you expect to sell by your average selling price per item.
2.) Estimate your variable costs. Variable costs are expenses directly related to the production and sale of an item. Your variable costs decrease when you produce less and increase when you sell more. Expenses in this category include material, labor and overhead.
3.) Subtract estimated variable costs from your estimated revenue. The result is your contribution margin — the amount you have left over to pay fixed costs and other expenses.
4.) Estimate your fixed costs. Fixed costs are expenses that stay the same regardless of how much you produce and sell. Examples of fixed costs include rent, advertising costs and equipment or loan payments.
5.) Subtract your fixed costs from the contribution margin. The result is your estimated net profit.