What is a Flexible Budget? Definition Meaning Example

what is a flexible budget

Of course, these two types of budgets aim to help business leaders manage business finances properly and correctly. A flexible budget is a budget design method that can adjust or adapt to changes in the level or volume what is a flexible budget of activities. Flexible budgets are better suited to types of activity with variable volumes than static budgets. A fixed budget is one that stays the same and doesn’t change based on variable costs. Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time.

  • However, this approach ignores changes to other costs that do not change in accordance with small revenue variations.
  • However, the restaurant experiences a significant increase in customer traffic during the first week of the month, resulting in higher food costs.
  • Thus, for a number of different situations, managers will have calculated their costs and revenues.
  • This type of budget is usually used to show costs per unit or percentage of sales.
  • While a static budget remains the same when created at the start of a new year, a flexible budget takes into account reduced or increased costs and helps businesses make adjustments to compensate.

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This type of budget is usually used to show costs per unit or percentage of sales. Flexible budgets have the ability to constantly restructure themselves around changes in activity. This adaptability allows flexible budgets to offer a precise picture of company performance, seeing as they’re always working with the most current data and details. Next, determine the activity levels that will drive your budget adjustments. Establish a range of activity levels, such as low, medium, and high, to cover various scenarios. This range provides a framework for adjusting your budget based on actual performance.

what is a flexible budget

Good for companies with variable costs

  • Once you know your fixed and variable costs, create a production plan from this data.
  • It’s best to save flexible budget systems for startups with several variables, like production.
  • For example, if you are only saving for retirement, which might be 30 years from now, then once you have a good emergency fund in a safe savings account you can probably invest more.
  • One budget plan that can adapt to future fluctuations is a flexible budget.
  • The amount of these royalties will inevitably vary depending on the magnitude of changes in the company’s income, including changes in the company’s own operations.
  • Automation makes budgeting easier — particularly when it comes to paying bills on time — but don’t let your expenses run on autopilot forever.

The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month. Using the following information, prepare a flexible budget for the production of 80% and 100% activity. More than Accounting for Churches likely, specific sections of your balance sheet or income statements could benefit from a bit more flexibility. If the last few years have taught SaaS companies anything, it’s that sometimes uncertainty is the only certainty there is. Recent years have illuminated how unpredictable the marketplace can be — making it increasingly challenging to create accurate budgets and execute an effective budget analysis on a recurring basis.

Advantages

The flexible budget offers the most customizable experience, allowing it to be easily adopted by many different businesses. Zero-based budgeting is a budgeting strategy that involves assigning each dollar of your income to a specific monthly expense, so your income minus your expenses always equals zero. The point of zero-based budgeting is to avoid overspending and to ensure that all the money you make serves a purpose.

what is a flexible budget

Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and balance sheet animation videos. Though the flex budget is a good tool, it can be difficult to formulate and administer. For the past 52 years, Harold Averkamp (CPA, MBA) hasworked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.

what is a flexible budget

Flexible budgets are especially helpful in environments where costs are closely aligned with the different level of business activity. SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. While creating and maintaining real-time adjustments can be somewhat time-consuming, there’s tangible value in terms of more efficient budget allocations and more agile decision-making. After each month (or accounting period) closes, a flexible budget assumes you’ll compare projected revenue to actual results and adjust the next month’s expenses accordingly.

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