What is a Flexible Budget? Definition Meaning Example

Flexible Budget

The flexible budget can be categorized into three different types. These include the basic flexible budget, intermediate flexible budget, and the advanced flexible budget. Businesses can opt to use one of these based on the need or goals of the company. With a flexible budget It’s easy to make adjustments when necessary, so that you can stay within your spending limits and still buy what you need. By aligning with strategic goals, financial forecasting software like Brixx enhances the flexibility and precision of budgeting, contributing to better decision-making.

Flexible Budget

SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers. This allows for an infinite series of changes in budgeted expenses that are directly tied to actual revenue incurred. However, this approach ignores changes to other costs that do not change in accordance with small revenue variations. Consequently, a more sophisticated format will also incorporate changes to many additional expenses when certain larger revenue changes occur, thereby accounting for step costs.

Can you manage flexible budgeting using a financial forecasting software?

Flexible budgets also have some drawbacks when it comes to business control. Creating and updating them require more time and effort due to the necessary calculations and assumptions based on the actual level of activity and output. They may not be ideal for long-term planning and forecasting, as they do not take into account the strategic goals and objectives of the business. Additionally, they can cause confusion and inconsistency in reporting and communication, as they may differ from the original or approved budget. Furthermore, they can incentivize wasteful or unethical behavior, as managers and employees may attempt to manipulate the level of activity or output to get favorable budgeted results. Flexible budgets and static budgets are two common types of budgets used by businesses to plan and control their activities.

As mentioned before, this model is a much more hands on and time consuming process requiring constant attention and recalibration. Flexible budgets work by taking the pressure off to predict future happenings. More often than not, our budgets should be just as flexible as we are. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years.

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However, they have different advantages and disadvantages depending on the nature and goals of the business. In this article, you will learn what flexible budgets and static budgets are, how they differ, and what are their pros and cons for business control. It is made to reference the actual results for calculating variances between the actual and budgeted results.

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These adjustments occur due to other changes within the activities of the business and allow a flex in order to have room in the budget for these alterations. The Flexible Budget is the opposite of the static budget, which stays fixed and does not consider the possible fluctuations. The static budget may be inaccurate if the actual volumes vary from the projected volumes. Flexible budgeting is the type of budgeting process which allows for adjustments due to other changes. It consists of preparing multiple budget scenarios which are then adjusted for different volumes.

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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 these uncertainties and make better informed decisions – the flexible budget. Accountants enter actual activity measures into the flexible budget at the end of the accounting period.

Does this mean the production manager has done a poor job in controlling costs? What is needed is a performance report where the budget is “flexed” based on the actual volume. To illustrate, assume that Mooster’s Dairy produces a premium brand of ice cream. Mooster’s Dairy uses a static budget based on anticipated production of 100,000 gallons per month. The monthly budget for total manufacturing costs is $505,000, as shown in the budget column below. The advantage to a flexible budget is we can create a budget based on the ACTUAL level of production to give us a clearer picture of our results by comparing the flexible budget to actual results.

What Is the Difference Between a Budget & a Rolling Budget?

While there is not specific equation or formula for the flexible budget, it uses the same basic method. A business generally uses a percentage or range of numbers to show the flex within the budget, which then creates budget scenarios based on other activities. A company can also use the flexible budget in order to allocate funds for a particular project. For example, a company may decide to use 10% of its revenue for marketing purposes. The company can then create a flexible budget to allocate 10% of its earned revenue instead of a specific fixed amount.

Over this time period, the shop expects an average of 250 customers per day (22,750 total), each buying one cup of coffee that costs $3. Once you identify fixed and variable costs, separate them on your budget sheet. Do executives have the stomach to say no, even when there is funding to undertake an unbudgeted project?

Specifically, when the actual output varies from the anticipated level, variances are likely to arise. If, however, the cost was identified as a fixed cost, no changes are made in the budgeted amount when the flexible budget is prepared. Differences may occur in fixed expenses, but they are not related to changes in activity within the relevant range. Additionally, they can demotivate and discourage managers and employees from achieving higher levels of efficiency and productivity. It is helpful for manufacturing industries where costs change with a change in activity level. Companies must involve experts to make accurate budgets, ensuring there is less scope for error and improving variance analysis.

Flexible Budget

This flexibility to adapt to change is useful to owners and managers. Flexible budgets calculate, for example, different levels of expenditure for variable costs. Subsequently, the budget varies, depending on activity levels that the company experiences. The first column lists the sales and expense categories for the company. The second column lists the variable costs as a percentage or unit rate and the total fixed costs. The next three columns list different levels of output and the changes in variable costs based on the increased or decreased sales.

What are the limitations of flexible budgeting?

Static budgets have some advantages for business control, such as their simplicity and ease of preparation. They are suitable for long-term planning and forecasting, as they reflect the strategic goals and objectives of the business, and provide a clear and consistent basis for reporting and communication. Furthermore, static budgets facilitate accountability and control, as managers and employees can be held responsible for meeting or exceeding the budgeted targets.

Eliminate manual data entry and create customized dashboards with live data. 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. This content is presented “as is,” and is not intended to provide tax, legal or financial advice.

A flexible budget created each period allows for a comparison of apples to apples because it will calculate budgeted costs based on the actual sales activity. Flexible budgeting has several advantages over static budgeting, which is based on a fixed level of output or activity. This type of budgeting can help managers to identify and analyze the factors that cause variances between actual and budgeted results, such as changes in prices, volumes, efficiency, or quality. Additionally, it allows them to adjust their budgeted expenses and revenues to reflect the actual level of output or activity, which can improve the accuracy and relevance of the budget. Furthermore, it enables them to evaluate the performance of different departments, units, or managers based on their actual output or activity, rather than on a predetermined standard.

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A flexible budget is a budget that can be changed, unlike a fixed budget. A flexible budget is usually created and adjusted based on the actual results, whereas a fixed budget will remain the same regardless of how well or poorly things are going. 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.

  • 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.
  • A flexible budget would spot this variance, and management could take corrective actions.
  • A company makes a budget for the smallest time period possible so that management can find and adjust problems to minimize their impact on the business.
  • A flexible budget is more complicated, requires a solid understanding of a company’s fixed and variable expenses, and allows for greater control over changes that occur throughout the year.
  • The store’s fixed costs, such as rent and salaries, remain constant at $10,000.

When people know there’s not an iron-clad expectation to stay within a static line item, there’s temptation to constantly ask for more. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Semi-variable expenses remain constant between 45% and 65% capacity, increasing by 10% between 65% and 80% capacity, and by 20% between 80% and 100% capacity. Flexible budgeting is a way to track your expenses and see how much you’ll be spending on different things. You can use it for anything from a home business to a construction project, but here’s an example of how it works.

Types of Flexible Budget

All of the different budget models have their benefits and drawbacks – even flexible budgets…as amazing as they sound. It’s most common to update forecasted line items in a flexible budget following a monthly review of total costs and top-line growth. An alternative is to run a high-level flex budget as a pilot test to see how useful the concept is, and then expand the model as necessary. For sake of illustration, let’s use a very simple, three-month budget for a coffee shop as an example.

A flexible budget provides budgeted data for different levels of activity. Another way of thinking of a flexible budget is a number of static budgets. For example, a restaurant may serve 100, 150, or 300 customers an evening. If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served? Similar scenarios exist with merchandising and manufacturing companies.

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