This adaptability allows businesses to make more accurate performance evaluations and forecasts, fostering better decision-making processes. A flexible budget is a financial plan designed to adjust for changes in activity levels, such as sales volume or production output. Unlike a static budget, which remains fixed, a flexible budget provides different budget amounts tailored to various activity levels.

Let’s look at how a flexible budget works in practice using ACME Corp., a small company that makes widgets. These budgets are different in different levels of activities, which facilitate the ascertainment of fixation of cost, selling prices, and tendering of quotations. Financial forecasting is the backbone of any successful business, and having access to forecasting tools in your native language can make all the…

Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced. This ongoing monitoring allows businesses to respond effectively to deviations in financial performance. When budgets can be easily modified, there is a potential for reduced accountability among budget owners. Flexibility allows for adjustments based on changing circumstances, but it can lead to less strict adherence to initial budget limits. Flexible budgets aren’t a one-size-fits-all solution, and that’s perfectly fine. The key is figuring out whether this approach aligns with how your business actually operates.

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. Unlike a static budget, a flexible budget changes or fluctuates with changes in sales, production volumes, or business activity.

Let’s assume a company determines that its cost of electricity and supplies will vary by approximately $10 for each machine hour (MH) used. It also knows that other costs are fixed costs of approximately $40,000 per month. Typically, the machine hours are between 4,000 and 7,000 hours per month. Based on this information, the flexible budget for each month would be $40,000 + $10 per 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.

Compare with actual performance

A flexible budget is usually designed to predict effects of changes in volume and how that affects revenues and expenses. In order to accurately predict the changes in costs, management has to identify the fixed costs and the variable costs. Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases. The main components of a flexible budget are fixed costs, variable costs, and revenue expectations that adjust according to different levels of business activity.

All budgeting methods should keep spending aligned with goals, cover essentials first, and include savings. It works best when you want to guarantee some savings while still giving yourself plenty of freedom. By forcing every dollar to serve a purpose, this method makes it nearly impossible for “mystery money” to slip through the cracks. There are dozens of different budgeting methods, and the trick is finding the one that actually fits your lifestyle. Let’s cut through the noise and break down the most popular (and surprisingly fun) budgeting techniques and strategies out there. It encourages strict adherence to predetermined costs, which can limit responsiveness to unforeseen opportunities or challenges.

• For example, the COVID-19 pandemic demonstrated the necessity of flexibility in budgeting, as many predictions became invalid.
• By adjusting to actual activity levels and market conditions, flexible budgets provide better financial control, enhanced performance measurement, and improved adaptability.
• Typically, the machine hours are between 4,000 and 7,000 hours per month.
• This structure also supports rapid scenario planning, as business owners can easily test budgetary outcomes across various production levels without recreating their entire financial plan from scratch.

Management carefully compares the budgeted numbers with the actual performance statistics to see where the company improved and where the company needs more improvement. This is the simplest form of a flexible budget, and it only alters those expenses that vary directly with revenue. In the example above, we showed that the restaurant does a simple adjustment based on the increase in customers, which directly affects revenue. Creating a flexible budget involves a systematic process to ensure its effectiveness and accuracy. The initial steps include reviewing financial history, categorizing costs, and determining financial goals.

These advantages collectively empower a business to respond swiftly to changes, optimise resource utilisation, and make well-informed financial decisions. By accommodating changes in activity levels, flexible budgeting enhances financial management practices and supports more accurate forecasting and planning. For entrepreneurs, the benefits become clear during periods of volatility, such as seasonal sales spikes or unexpected market downturns. A service-based business, for example, can use flexible budgeting to adjust costs according to the number of projects completed within a month, aligning expenditures with real revenue rather than forecasts. Similarly, manufacturers or retailers facing shifts in consumer demand can scale their budgets to maintain tight operational control, ensuring they only spend what is necessary.

Advanced: Integrates data analytics and dynamic models

• The social pressure adds built-in accountability, making loud budgeting more motivating than any spreadsheet.
• A product item refers to a unique version of a product that is distinct from the organisations other products.
• There are always a set of low- cost hotel are available among the 5-star hotels.
• The key differences between static vs. flexible budgets center on adaptability, accuracy, and responsiveness.
• The business had planned to sell 25,000 units in 2022 at a price of $6.50.

Flexible budget recognises concept of variability and provides logical comparison of expenditure with actual expenditure as a means of control. Static budgets are often used by non-profit, educational, and government organizations since they have been granted a specific amount of money to be allocated for a period. Tell your friends, your group chat, even your TikTok followers what your money goals are. The social pressure adds built-in accountability, making loud budgeting more motivating than any spreadsheet.

How to See the Impact of Funding Decisions in Brixx

Examples of variable costs include raw materials used in production, shipping costs, and packaging. Sometimes, you may know that a budget needs to be adjusted, but you may not know how to change the budget. A flexible budget answers that question given that expense levels are dynamic.

A flexible budget, on the other hand, adjusts to reflect the actual level of activity, flexible budget providing a more accurate financial picture. Imagine a retail store that creates a flexible budget for its monthly operating expenses. The store’s fixed costs, such as rent and salaries, remain constant at £10,000. Additionally, variable costs, like inventory and utilities, are projected at £5,000 for an assumed activity level of 1,000 customers.

Only the purely variable expenses vary proportionately with the activity level. Variable cost refers to business expenses that vary directly with the level of output or production. With flexible budget, it is possible to establish budgeted cost for any range of activity. It is mainly used to get a clearer picture of performance by looking at real activity levels. These are the costs that you’ll first look to as adjusting based on your measurement of sales activity. Using a flexible budget helps you identify where you need to reduce spending to protect your bottom line.