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What Is Flexible Budgeting? Tips & Example

what is a flexible budget

If your company regularly conducts a flux analysis, syncing this process with your flexible budget creation can help save time. A great deal of time can be spent developing step costs, which is more time than the typical accounting staff has available, https://centraltribune.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ 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.

Identify fixed and variable 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.
  • Though the flex budget is a good tool, it can be difficult to formulate and administer.
  • Only then is it possible to issue financial statements that contain budget versus actual information, which delays the issuance of financial statements.
  • Let’s face it  – business moves fast, and we have to be flexible for what is thrown at us.
  • Simply add boiling water, close the lid for 3 minutes and you’ve got an instant meal.

Then, they can modify the flexible budget when they have their actual production volume and compare it to the flexible budget for the same production volume. 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 Navigating Financial Growth: Leveraging Bookkeeping and Accounting Services for Startups throughout the year. For example, suppose a proposed sale of items does not occur because the expected client opted to go with another supplier. In a static budget situation, this would result in large variances in many accounts due to the static budget being set based on sales that included the potential large client.

  • Datarails’ budgeting and forecasting software can help your team create and monitor budgets faster and more accurately than ever before.
  • Let’s assume a company determines that its cost of electricity and supplies will vary by approximately $10 for each machine hour (MH) used.
  • Due to its flexibility and response to marketplace and company changes, flexible budgeting requires ample attention.
  • While accounting software is an important part of tracking all of your financial transactions, many software applications simply don’t have the capability of preparing a flexible budget.
  • A flexible budget cannot be preloaded into the accounting software for comparison to the financial statements.

Drive Business Performance With Datarails

Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time. 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. It begins with a static framework built from the costs that are not anticipated to change throughout the year.

Revenue Comparison

Those siloes make flexible budgeting nearly impossible and limit the strategic value of an over-stretched finance team. But with Mosaic’s business budgeting software, you can streamline processes and break down silos to act as a more collaborative partner to everyone in the business. With Mosaic, you can also import your financial statements from Excel, ensuring seamless integration and facilitating a more holistic view of your financial position. 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. While this isn’t a reason to avoid flexible budgeting altogether, it’s good to keep in mind as you consider how and when to implement this kind of budgeting strategy.

Model different scenarios with the budget model

what is a flexible budget

Companies develop a budget based on their expectations for their most likely level of sales and expenses. Often, a company can expect that their production and sales volume will vary from budget period to budget period. They can use their various expected levels of production to create a flexible budget that includes these different levels of production.

what is a flexible budget

What is flexible budget variance?

what is a flexible budget

Benefits of a Static Budget

  • 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.
  • Expenses such as rent, management salaries, and marketing costs remain static and do not change based on production.
  • This is more of an art than a science, but you should begin by prioritizing via a conservative budget and then layering on more convenient or superfluous expenses.
  • Now that you’ve mapped your numerous scenarios, it’s time to assign some budget numbers and parameters.
  • Let’s imagine that a manufacturer has determined what its electricity and supplies costs are for the factory.

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