What is a flexible budget? Definition and example

flexible budgeting definition

Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . While flexibility is great, sometimes something unexpected happens that invalidates all the work you did before. This content is presented “as is,” and is not intended to provide tax, legal or financial advice. 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.

The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward. Flexible budgets offer close monitoring of expenses versus revenue, and they allow for the opportunity http://aloha-hawaii.ru/?ctpahutca=1&partn=12 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.

What Is a Flexible Budget for Small Business?

In addition, a flexible budget can successfully justify increases in costs when compared to actual income. Now let’s illustrate the flexible budget by using different levels of volume. If 5,000 machine hours were necessary for the month of January, the flexible budget for January will be $90,000 ($40,000 fixed + $10 x 5,000 MH). If the machine hours in February are 6,300 hours, then http://intvua.com/biznes/2022/07/25/s-26-iulia-podorojaut-polisy-zelenaia-karta.html the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March has 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). For costs that vary with volume or activity, the flexible budget will flex because the budget will include a variable rate per unit of activity instead of one fixed total amount.

  • As mentioned before, this model is a much more hands on and time consuming process requiring constant attention and recalibration.
  • Static budgets typically act as a guideline, meaning they can be changed or adjusted once the variances have been identified via a flexible budget.
  • Flexible budgets adapt to changes in activity levels by adjusting budgeted figures based on actual activity, offering a more accurate reflection of costs and revenues.
  • A fixed budget is one that stays the same and doesn’t change based on variable costs.
  • While flexibility is great, sometimes something unexpected happens that invalidates all the work you did before.
  • Once a period has ended, management must compare the forecasts from the static or master budget to the company’s performance.

Flexible budget variance is the difference in spending or revenue between the base or original budget and the budget that was flexed into. Because you’ve planned for variances in the budget, you know exactly which path to follow to maintain the trajectory that’ll keep the company on plan. A static budget stays at a single amount regardless of how much activity there is. Historically financial modeling has been hard, complicated, and inaccurate.

What is a Flexible Budget?

It’s also important to request accountability for all changes made to this budget in order to keep it working for you. Flexible budgets are best used for startups that have a number of variables such as manufacturing, and others that have revenue based on seasonality, as costs are directly impacted by demand. Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced.

flexible budgeting definition

By the fourth quarter, sales are expected to be strong enough to pay back the financing from earlier in the year. The budget shown in Figure 7.25 illustrates the payment of interest and contains information helpful to management when determining which items should be produced if production capacity is limited. Budgeting is an essential part of planning, financial control, and performance management. 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.

What Is a Budget?

Budget variance analysis is an essential final step of any budgeting process and a necessary prerequisite to the next budgeting cycle. Companies around the globe experienced this in March 2020 when the COVID-19 pandemic required lockdowns that grounded much of the economy http://linki.net.ua/page/112?c=46 to a halt. Models and projections were scrapped, and companies that had spent a lot of time and resources on creating a flexible budget saw huge amounts of their time and effort invalidated. And with a flexible budget, you have multiple contingencies to stay on plan.

flexible budgeting definition

There is no way to highlight whether actual revenues are above or below expectations. 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.

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