Why a Flexible Budget May Be a Good Option for Your Business

what is a flexible budget

A flexible budget cannot be preloaded into the accounting software for comparison to the financial statements. Only then is it possible to issue financial statements that contain budget versus actual information, which delays the issuance of financial statements. Flexible budgeting can be used to more easily update a budget for which revenue or other activity figures have not yet been finalized. Under this approach, managers give their approval for all fixed expenses, as well as variable expenses as a proportion of revenues or other activity measures. Then the budgeting staff completes the remainder of the budget, which flows through the formulas in the flexible budget and automatically alters expenditure levels. In short, a flexible budget gives a company a tool for comparing actual to budgeted performance at many levels of activity.

More time-consuming to create, develop, monitor, and maintain

what is a flexible budget

The knowledge that the budget can be adjusted can be a green light for some budget owners to play with their spending. Be careful to set expectations with them that deviations from the budget come from the FP&A team. While flexibility is great, sometimes something unexpected happens that invalidates all the work you did before.

Basic vs. intermediate vs. advanced flexible budgets

Flexible budgets offer close monitoring of expenses versus revenue, and they allow for the opportunity to test things out and see what might work and what won’t without rigid financial constraints. 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 $5 a month for this.

Flexible Budget Vs. Fixed Budget

There is no way to highlight whether actual revenues are above or below expectations. Now that we know how to create the flexible budget, the next step is to understand the variance analysis – the comparison between the flexible budget and the business’s actual performance. Your flexible budget would then look at revenue, based on both units sold and sales price.

While it’s great to have an ideal, static budget, the flexible budget is more true to how companies and budget owners actually assess their finances. The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable. In short, a flexible budget requires extra time to construct, delays the issuance of financial statements, does not measure revenue variances, and may not be applicable under certain budget models. If so, one can integrate these other activity measures into the flexible budget model.

Flexible Budget vs. Static Budget

A static budget is typically based on a fixed level of activity or output and does not change with changes in sales volume, production volume, or other measures of business activity. It is often created at the beginning of the budget period and is not adjusted as the period progresses. A static budget is useful for providing a https://theseattledigest.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ baseline for planning and evaluating performance, but it may not be as accurate as a flexible budget. A flexible budget starts with fixed expenses, then layers a flexible budgeting system on top that allows for any fluctuation in costs. Most flexible budgets use a percentage of projected revenue to account for variable costs.

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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. This approach varies from the more common static budget, which contains nothing but fixed expense amounts that do not vary with actual revenue levels.

what is a flexible budget

Static Budgets vs. Flexible Budgets

  • Flexible budget variance is any difference between the results generated by a flexible budget and actual results from following that budget.
  • Finmark is everything you need to build an accurate, customized financial model.
  • Better yet, when you have real-time budget visibility, you can forecast or update your budget (as needed) and see those updates reflected on other key metrics that matter to your business.
  • It accurately represents expected financial outcomes in the real world by considering different scenarios and variations in income and expenses.

A flexible budget is best used in a manufacturing environment where the budget is able to be based on production volume. It provides insights into how well an organization https://financeinquirer.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ has managed its finances in response to changing conditions and activity levels. Thus, it helps managers make informed decisions and improve budgeting processes.

what is a flexible budget

Understanding a Static Budget

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. Let’s suppose the production machinery had to operate for 4,500 hours during February. Let’s imagine that a manufacturer has determined what its electricity and supplies costs are for the factory. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

A flexible budget is designed to change based on revenue or production levels. Unlike a static budget, which can be prepared in anticipation of performance, a flexible budget allows you to adjust the original master budget using actual sales and/or production volume. A company wants to prepare a budget based on a scheduled activity level of 70% of the production capacity, where the number of units designed is 7000. A flexible budget is typically Navigating Financial Growth: Leveraging Bookkeeping and Accounting Services for Startups created by identifying the various costs and expenses that vary with changes in activity levels and calculating the expected cost or expense for each level of activity. They increase the cost of the product to account for this variance and make 50 of their 100 product sales during this reporting period at this new price. Their flexible budget variance for this product, therefore, is -$250 (50 units sold with $5 more COGS than budgeted, or -$5).

  • A flexible budget lets you adjust to global trends and economic changes rather than trying to anticipate when those will happen (and likewise brace for their impact).
  • These changes can be due to variations such as changing inventory costs, supply chain concerns, and market conditions.
  • As it turns out, the ability to respond to the actual performance of your company can be useful for maintaining the status quo and for growing faster than expected.
  • The difference between a flexible budget and a static budget is that static budgets deal with fixed budget amounts that don’t vary as other line items increase and decrease.

Flexible budgets are usually prepared at each business analysis period (either monthly or quarterly), rather than in advance. Flexible budgeting can also tie into anything related to headcount (like employee benefits and salaries). If you were to forecast the cost of benefits, you’d link the budget line item to your headcount planning forecast so that as headcount increases, the cost of benefits also increases according to the per-employee assumption. As traffic to the company’s site increases, hosting costs likewise increase. That’s why SaaS companies might make a connection between an AWS budget line item and the assumption for customer growth.

And if you’d like to create a flexible budget for your organization, Prophix can help. With Prophix, you can quickly and easily create scenarios and calculate your budget analysis, minimizing the two biggest time sucks of the budgeting process. A flexible budget, by its nature, will account for unforeseen expenses to some degree. While the magnitude of the unforeseen expense(s) might not align with what you’ve created in the budget, the path you’ve laid out for the business will in many cases be applicable, with some adjustments to the raw numbers. As it turns out, the ability to respond to the actual performance of your company can be useful for maintaining the status quo and for growing faster than expected. Uncertain market conditions make the case for the flexible budget, as it’s more certain that a single plan won’t be followed.


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