What is a Flexible Budget? Definition Meaning Example

flexible budgeting definition

Thus, the availability of these experts is a vital factor in designing a flexible budget. A flexible budget helps to recognize operational errors and inefficiencies. Therefore, a flexible budget is a great tool for correction and control. Learn how it can help your business respond to the ups and downs of the marketplace. And with out-of-the-box metrics, templates, and dashboards like the forecast vs. actuals dashboard, you can shorten the budget allocation and planning process from two weeks down to two days. Mosaic eliminates silos by connecting to your ERP, CRM, HR system, and billing systems to centralize financial data from across departments.

With an understanding of revenue per unit and cost behaviours (ie fixed, variable, and stepped), financial results can then be budgeted within a range of activity levels. A flexible budget is an adjustable budget that companies create for different levels of activity, i.e., different output levels, revenues, or expenses for a single budgeting period. A flexible budget cannot be preloaded into the accounting software for comparison to the financial statements. Only then is it possible to issue financial statements that contain budget versus actual information, which delays the issuance of financial statements.

Flexible Budget: Definition, Formula, Advantages, Disadvantages, Meaning, Accounting

This article will delve deeper into all you need to know about flexible budgeting. Suddenly, there is only one company to meet demand for widgets, resulting in actual sales of 200 units per month. The actual revenue the widget company What is a voided check: When and how to void a check is taking in has doubled—but the production costs would also go up. The flexible budget for the quarter would reflect both these things. Budgeting is an essential part of planning, financial control, and performance management.

If your company regularly conducts a flux analysis, syncing this process with your flexible budget creation can help save time. 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 How to prepare a statement of retained earnings for your business accordingly. The difference between your projected and actual figures gives you the flexible budget variance, an essential metric to understand how well your predictions align with your actual performance. With flexible budgeting, managers will be able to plan and forecast more accurately. Performance management can be more meaningful as actual results can be easily compared to flexed results – total variances can then be calculated for each revenue and cost.

Flexible Budget Vs. Fixed Budget

Within an organization, static budgets are often used by accountants and chief financial officers (CFOs)–providing them with financial control. The static budget serves as a mechanism https://intuit-payroll.org/kruze-consulting-accounting-cfo-tax-hr-for/ to prevent overspending and match expenses–or outgoing payments–with incoming revenue from sales. In short, a well-managed static budget is a cash flow planning tool for companies.

flexible budgeting definition

Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams. More than 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. Many costs are not fully variable, instead having a fixed cost component that must be derived and then included in the flex budget formula. Although the budget report shows variances, it does not explain the reasons for the variance.

Flexible budget examples

That would mean the budget would fluctuate along with the company’s performance and real costs. Flexible budgets adapt to changes in activity levels by adjusting budgeted figures based on actual activity, offering a more accurate reflection of costs and revenues. This adaptability makes them valuable for dynamic environments, enabling better performance evaluation and resource allocation.

  • The budget report is used by management to identify the sales or expenses whose amounts are not what were expected so management can find out why the variances occurred.
  • After the accounting period, the company realized sales were $12 million.
  • A flexible budget helps ascertain the variability of cost factors at different activity levels.
  • This article will delve deeper into all you need to know about flexible budgeting.
  • Organizations of all sizes have found the need to be more flexible and nimbler in their planning procedure.

Proper cash flow management helps ensure companies have the cash available in the event a situation arises where cash is needed, such as a breakdown in equipment or additional employees needed for overtime. Divide your variable costs by the total number of units to determine the variable cost per unit. For instance, if it costs you $4,000 to produce 100 units, you should divide $4,000 by 100 to get the cost per unit( $40 in this case).

Pandemic Budget: 70% Capacity

In financial planning and analysis, adapting and responding to changing circumstances is critical for organizations seeking to optimize their budgeting processes. By incorporating a dynamic and responsive approach to budgeting, companies can better align their financial plans with the ever-evolving landscape where they operate. When we compare fixed and flexible budgets, we will discover the more applicable and useful ones. Even if a static or fixed budget is easy to prepare, ideally, it isn’t an excellent budgeting approach because fixed budgeting does not leave room for modifications. A flexible budget aids in variance analysis after comparing the company’s actual results.