Why Fixed Budgets Fail in Volatile Times

Each September, finance teams across the world find themselves wrestling with the same question: how on earth do you plan for a year that refuses to sit still? Budgets, after all, are supposed to be the map for a company’s journey. Yet when the economic terrain shifts as quickly as it has in recent years, a fixed budget starts to look less like a map and more like a faded tourist brochure. It still shows the roads, but half of them are closed, and the landmarks are under renovation.

The Trouble with Certainty

For decades, businesses treated budgeting as a largely administrative exercise. You looked at last year’s numbers, adjusted a few assumptions, added a bit for growth, shaved off some costs, and presented it neatly to the board. The assumptions rarely held, but they were at least familiar. What has changed is the level of volatility. A global 2024 survey conducted by the World Economic Forum found that 80 per cent of firms have faced unexpected financial shocks in the last five years, ranging from pandemic shutdowns to sudden swings in consumer demand. Under those conditions, the traditional “set it and forget it” budget is exposed. Research suggests that firms relying on rigid, fixed budgets see average revenue losses of around ten per cent during downturns, a significant penalty for holding onto a structure that offers little protection.

What Flexible Budgeting Really Means

Flexible budgeting has emerged as a countermeasure. The phrase sounds suspiciously like consultancy-speak, yet its logic is plain. Instead of locking the business into a single set of assumptions, flexible budgeting allows teams to adjust spending, forecasts, and priorities in response to what is actually happening. The techniques vary. A rolling budget adds a new month or quarter each time one ends, so the plan always looks forward twelve months. Zero-based budgeting forces every line item to be justified from scratch, an approach that strips out inertia and can be bracing for managers accustomed to automatic allocations. Activity-based budgeting, meanwhile, ties costs directly to business activities, making it easier to cut back or ramp up in line with demand. Each has its advocates, but they all share one premise: uncertainty is the default, not the exception.

The evidence in favour of this shift is strong. A recent study tracking firms between 2020 and 2024 found a positive correlation between budget flexibility and profit margins. As companies improved their ability to adapt budgets, they consistently outperformed those sticking with fixed frameworks. The difference was not marginal. Businesses that employed flexible techniques reported 12 to 18 per cent higher profit margins and saw budget variances reduced by a quarter. That is not because flexibility magically eliminates shocks, but because it equips firms to absorb them. When the market lurches, the business can bend rather than break.

Flexibility Without Structure Becomes Chaos

Still, there is a catch. Flexible budgeting is not simply a matter of telling managers to “stay nimble”. Without systems to support it, flexibility quickly collapses into confusion because forecasting essentially becomes guesswork, meetings multiply, and the same numbers are reworked in endless versions of Excel. The research highlights these challenges: forecasting accuracy is difficult to maintain in volatile conditions, organisational resistance slows adoption, and smaller firms often lack the tools to integrate real-time data. Flexibility without structure risks becoming chaos with better branding.

This is where finance leaders often find themselves trapped. Boards expect a budget that shows control and certainty. Operational teams demand room to adjust when reality changes. Regulators still want compliance and consistency. The role of the finance function, therefore, is to balance these competing demands: to give the business room to manoeuvre without undermining trust in the numbers. In practice, that means moving from budgeting as a once-a-year event to budgeting as an ongoing process, closer to continuous management than a static plan.

Making Flexibility Work in Practice

The cultural shift this requires should also not be underestimated. Budgets are as much numbers as they are expressions of priorities and power. So, when a department’s line is cut, it is not merely a financial adjustment but a signal of diminished importance. When companies move to flexible budgeting, it means managers are asked to relinquish the comfort of guaranteed allocations, and executives are asked to accept numbers that may shift more frequently than they would like. Change of this nature rarely happens without tension.

So what makes flexibility workable rather than wishful? The research points to a few best practices. Scenario planning is one: building multiple models that anticipate different economic outcomes, so the business is not caught scrambling when the world veers left instead of right. Another is rolling forecasts, which ensure the business is never planning less than a year ahead. Cross-functional collaboration matters too. Budgets are not purely financial documents; they reflect choices in operations, marketing, and strategy. Bringing those voices into the process helps ensure that revisions are grounded in the realities of the business rather than abstract numbers on a spreadsheet. And finally, the use of real-time analytics has become indispensable. A flexible budget without timely data is little more than educated guesswork.

Where Tools Like Solver Fit In

Here lies the connection to tools like Solver. The promise of flexibility is appealing, but the execution requires infrastructure that most finance teams cannot cobble together from spreadsheets alone. Solver offers the ability to consolidate data, run scenarios, and update forecasts in real time while still presenting numbers in a way that feels familiar to teams steeped in Excel. It reduces the friction of constant reforecasting by giving managers structured ways to test assumptions and adjust allocations. In effect, it creates the rails on which flexibility can run, ensuring that agility does not come at the expense of clarity.

From Contract to Compass

The deeper point is not that budgeting has become obsolete but that its purpose has changed. In stable times, a budget was a contract: a fixed agreement on how resources would be deployed. In volatile times, it is more like a compass: a tool that provides direction but allows for course corrections when conditions shift. The companies that thrive are those that treat budgeting as an active capability, not an administrative burden. They do not wait for the annual cycle to rethink their numbers; they build systems that allow for constant adjustment without losing the thread of strategy.

Budgeting season will never be anyone’s favourite time of year. The long hours, the tense meetings, and the endless negotiations over line items are unlikely to vanish. Yet by shifting from rigidity to flexibility, finance leaders can at least ensure that their efforts produce plans that stand a chance of surviving contact with reality. Flexible budgeting is not a panacea. It will not make forecasting easier, nor will it insulate a business from shocks. What it can do is give organisations a fighting chance to adapt, to preserve profitability when conditions worsen, and to seize opportunities when they appear. That, in an era of uncertainty, is as close to certainty as finance teams are likely to get.

Reference:

Martinez, O., Jagannathan, O., Laurent, M. and Calloway, W., 2025. The role of flexible budgeting in uncertain economic environments: How businesses can adapt budgeting strategies to market volatility and global shocks. Journal of Finance and Business Strategy, 5, pp.1–29. doi:10.5281/zenodo.15618346.