English EN French FR

What is a flexible budget? Definition and example

flexible budgeting definition

Imagine your product goes viral on social media and gains unexpected popularity overnight, now there is a demand for 20 units next month, which would cost $20 to make. Now, let’s assume that it costs one dollar to make each unit of product, so you budget What exactly is bookkeeping for attorneys $5 a month for this. For example, if your business predicts that five units will sell per month at $5 each, you can expect a revenue of $25 a month. (ii) Flexible budgets enable more accurate assessment of managerial and organizational perfor­mance.

  • Within an organization, static budgets are often used by accountants and chief financial officers (CFOs)–providing them with financial control.
  • This flexible budget is unchanged from the original (static budget) because it consists only of fixed costs which, by definition, do not change if the activity level changes.
  • It accurately represents expected financial outcomes in the real world by considering different scenarios and variations in income and expenses.
  • In its simplest form, the flex budget will use percentages of revenue for certain expenses, rather than the usual fixed numbers.

The flexible budget shows an even higher unfavorable variance than the static budget. This does not always happen but is why flexible budgets are important for giving management an indication of what questions need to be asked. Across the landscape of financial planning and management, businesses often encounter fluctuations in their financial and operations variables. A key tool can come into play to help navigate https://adprun.net/crucial-accounting-tips-for-small-start-up/ these uncertainties and make better informed decisions – the flexible budget. Flexible budgets usually try to maintain the same percentages allotted for each aspect of a business, no matter how much the budget changes. So if the initial static budget called for 25% to be spent on marketing, the flexible budget will maintain that same percentage for marketing whether the budget increases or decreases.

Disadvantages of Flexible Budgeting

Flexible budgets work by taking the pressure off to predict future happenings. Let’s face it  – business moves fast, and we have to be flexible for what is thrown at us. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

Flexible budgets do not fix variances, they help to better plan for the future. Revenue is still calculated at month end so costs cannot be retroactively adjusted. After each month (or set period) closes, you compare the projected revenue against the actual revenue and adjust the next month’s expenses accordingly. Many costs are not fully variable, instead having a fixed cost component that must be derived and then included in the flex budget formula.

Pandemic Budget: 70% Capacity

Proper cash flow management helps ensure companies have the cash available in the event a situation arises where cash is needed, such as a breakdown in equipment or additional employees needed for overtime. The choice between the two depends on business requirements for accuracy and adaptability versus the desire for a simpler budgeting process. Flexible budgets have a reputation for being more time-consuming than other budgeting models. That’s because flexible budgets require continual upkeep and maintenance — you’re constantly having to keep an eye out for fluctuations and then execute those changes as quickly as you can.

Additionally, flexibility supports better cost management, promoting efficiency and resource optimization within the organization. The original budget for selling expenses included variable and fixed expenses. To determine the flexible budget amount, the two variable costs need to be updated.

Facilitate Flexibility With NetSuite Planning and Budgeting

This adaptability makes them valuable for dynamic environments, enabling better performance evaluation and resource allocation. Over time, though, your actual production, sales, and revenue will change. These changes can be due to variations such as changing inventory costs, supply chain concerns, and market conditions.

It is a competency that must be acquired for anyone who is working in finance and accounting and is also a topic which is guaranteed to come up on your Performance Management (PM) exam. Expect to see it in Sections A or B, and there is a fair chance of it appearing in Section C, so you need to be ready to handle 20-mark questions from both a numerical and a discussion-based perspective. This series of articles will cover the budgeting approaches Webinar: Nonprofit Month-End Closing Accounting Procedures flexible budgeting, activity-based budgeting, rolling budgeting, zero-based budgeting, and beyond budgeting. Creating a flexible budget begins with assigning all static costs a fixed monthly value, and then determining the percentage of revenue to assign to your variable costs. A flexible budget adjusts based on changes in actual revenue or other activities. The result is a budget that is fairly closely aligned with actual results.

What Is a Flexible Budget?

A great deal of time can be spent developing step costs, which is more time than the typical accounting staff has available, especially when in the midst of creating the more traditional static budget. Consequently, the flex budget tends to include only a small number of step costs, as well as variable costs whose fixed cost components are not fully recognized. It is also a useful planning tool for managers, who can use it to model the likely financial results at a variety of different activity levels. Within an organization, static budgets are often used by accountants and chief financial officers (CFOs)–providing them with financial control. The static budget serves as a mechanism to prevent overspending and match expenses–or outgoing payments–with incoming revenue from sales. In short, a well-managed static budget is a cash flow planning tool for companies.

Leave a Reply

Your email address will not be published. Required fields are marked *