What is a Flexible Budget? Definition Meaning Example

Of course, if you have the means in the future, you can use both budgets to benefit from their advantages. But I think that for a small business that’s just starting out, a static budget will work. It provides insights into how well an organization has managed its finances in response to changing conditions and activity levels. Thus, it helps managers make informed decisions and improve budgeting processes. When using a static budget, a company or organization can track where the money is being spent, how much revenue is coming in, and help stay on track with its financial goals. Although the budget report shows variances, it does not explain the reasons for the variance.

• The selling and administrative expense budget deal with non-manufacturing costs such as freight or supplies.
• The flexible budget cost of goods sold of $196,875 is $11.25 per pick up truck times the 17,500 trucks sold.
• The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable.
• Also add the capital expenditures budget and the cash-flow budget to arrive at a budgeted balance sheet.

Also add the capital expenditures budget and the cash-flow budget to arrive at a budgeted balance sheet. For costs that vary with volume or activity, the flexible budget will flex because https://personal-accounting.org/accounting-for-startups-7-bookkeeping-tips-for/ the budget will include a variable rate per unit of activity instead of one fixed total amount. In short, the flexible budget is a more useful tool when measuring a manager’s efficiency.

Flexible Budget Meaning

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. Flexible budgeting is an adaptable budgeting method that enables businesses to modify expense constraints in real-time according to changes in costs, production, sales, or other factors. This approach varies from the more common static budget, which contains nothing but fixed amounts that do not vary with actual revenue levels. This means that the variances will likely be smaller than under a static budget, and will also be highly actionable.

Most flexible budgets use a percentage of projected revenue to account for variable costs rather than assigning a rigid numerical value at the start. Choosing the appropriate types of budgets for businesses is also dependent on how great the level of variance actually is in terms of increased or decreased profits. This variance is directly affected by the nature of expenses as well, which can be fixed or fluctuating in nature. A static budget approaches variance by trying to work in excess resources beforehand for any possible changes in demand down the road, and can therefore lead to issues with inventory. A flexible budget flexes the static budget for each anticipated level of production. This flexibility allows management to estimate what the budgeted numbers would look like at various levels of sales.

Flexible Budgeting 101: What Is It & How Does It Work?

Static budgets may be more effective for organizations that have highly predictable sales and costs, and for shorter-term periods. They work well for evaluating performance when the planned level of activity is the same as the actual Accounting For Startups The Entrepreneur’s Guide level of activity, or when the budget report is prepared for fixed costs. However, if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled.

• If a budget is prepared assuming 100 customers will be served, how will the managers be evaluated if 300 customers are served?
• Layered on top of that is a flexible budget system allowing for variable costs to fluctuate based on sales performance.
• The budgeted balance sheet predicts the final effect of costs and sales on the company’s balance sheet.
• The company knows its variable costs per unit and knows it is introducing its new product to the marketplace.

Flexible budgets usually try to maintain the same percentages allotted for each aspect of a business, no matter how much the budget changes. So if the initial static budget called for 25% to be spent on marketing, the flexible budget will maintain that same percentage for marketing whether the budget increases or decreases. Due to its flexibility and response to marketplace and company changes, flexible budgeting requires ample attention. The disadvantages of flexible budgeting include its time-consuming nature, lack of accuracy, and delays in processing.

Implementing Budgets

A static budget–which is a forecast of revenue and expenses over a specific period–remains unchanged even with increases or decreases in sales and production volumes. However, when compared to the actual results that are received after the fact, the numbers from static budgets can be quite different from the actual results. Static budgets are used by accountants, finance professionals, and the management teams of companies looking to gauge the financial performance of a company over time. Flexible budgets are one way companies deal with different levels of activity.