What is a Flexible Budget? Advantages & Disadvantages

what is a flexible budget

Datarails’ budgeting and forecasting software can help your team create and monitor budgets faster and more accurately than ever before. The company also knows that the depreciation, supervision, and other fixed costs come to about $35,000 per month. A Flexible Budget is a budget or financial plan that varies according to the company’s needs. They made it flexible because the specific company’s or department’s needs do not remain static.

Optimal Usability in Variable Cost Environments

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. In short, the flexible budget is a more useful tool when measuring a manager’s efficiency. Instead, the hope is that patterns https://www.quick-bookkeeping.net/how-far-back-can-the-irs-audit-you-new-2021/ will be observed making future cost planning easier and more accurate. In addition, a flexible budget can successfully justify increases in costs when compared to actual income. All of the different budget models have their benefits and drawbacks – even flexible budgets…as amazing as they sound.

Not All Costs Are Variable

what is a flexible budget

For SaaS companies, flexible budgeting relates more to the cost of revenue — the actual costs for creating and delivering a product/service to customers. The cost of revenue involves hosting fees, service and cloud fees, and website development. Revenue and cost needs to be compared monthly and adjustments or notes should be made. Additionally, flexible budgets have a lack of accountability to some degree since they are so fluid and open to change. In short, a flexible budget requires extra time to construct, delays the issuance of financial statements, does not measure revenue variances, and may not be applicable under certain budget models.

Disadvantages of flexible budgeting

A flexible budget adjusts based on changes in actual revenue or other activities. This approach varies from the more common static budget, which contains nothing but fixed expense https://www.quick-bookkeeping.net/ amounts that do not vary with actual revenue levels. A flexible budget adjusts for changes in activity levels for all costs, including both fixed and variable costs.

The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable. Flexible budgeting puts more pressure on you to have rock-solid financial assumptions as you tie various line reorder level of stock explanation formula example items together in the model. And the reality is that the effort you put into tying certain line items together may not be worth the time. Not every line item or set of line items has a strong enough correlation to others for flexible budgeting to work.

  1. A sophisticated flexible budget will change the proportions for these expenditures if the measurements they are based on exceed their target ranges.
  2. 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.
  3. By understanding the advantages and disadvantages of a flexible budget, businesses can make an informed decision about which budgeting approach is best for their needs.
  4. The more sophisticated relative of the static budget model, a flexible budget allows for change, and as we’ve said – business can be unpredictable.

However, the restaurant experiences a significant increase in customer traffic during a particular week, resulting in higher food costs. This is where a flexible budget comes into play justifying the cost increase based on the actual earned revenue. We’ve previously covered the five different types of budget models that businesses can choose from. The flexible budget offers the most customizable experience, allowing it to be easily adopted by many different businesses. Though the flex budget is a good tool, it can be difficult to formulate and administer.

what is a flexible budget

In the case of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales. A flexible budget is a budget that adjusts for changes in the level of activity or output. Unlike a static budget, which is based on a fixed level of activity or output, a flexible budget is designed to be adaptable to changes in sales volume, production volume, or other measures of business activity.

Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams. If you don’t want to spend hours tracking and forecasting your budget in spreadsheets, check how to adjust an entry for unearned revenue chron com out our financial modeling tool. Finmark is everything you need to build an accurate, customized financial model. After each month (or set period) closes, you compare the projected revenue against the actual revenue and adjust the next month’s expenses accordingly.

Forecasting tools can integrate with various data sources, like Xero Accounting, and spreadsheets, to collect accurate data on activity levels and costs. They enable scenario modeling to project different outcomes based on varying activity levels, ensuring adaptability in budgeting – something that is essential in flexible budgeting. A flexible budget is typically created by identifying the various costs and expenses that vary with changes in activity levels and calculating the expected cost or expense for each level of activity. 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.

ABC Company has a budget of $10 million in revenues and a $4 million cost of goods sold. Of the $4 million in budgeted cost of goods sold, $1 million is fixed, and $3 million varies directly with revenue. Once the budget period has been completed, ABC finds that sales were actually $9 million. If it used a flexible budget, the fixed portion of the cost of goods sold would still be $1 million, but the variable portion would drop to $2.7 million, since it is always 30% of revenues.

A flexible intermediate budget takes into account expenses that go beyond a company’s revenue. 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 do not fix variances, they help to better plan for the future. Revenue is still calculated at month end so costs cannot be retroactively adjusted. Flexible budgets take time to maintain, with routine monthly reviews and edits. 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 dynamic systems which allow for expansion and contraction in real time.

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