define flexible budget

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Creating a budget, even one that’s not constantly evolving, can be an overwhelming to-do on the never-ending checklist facing leaders of emerging businesses. Cash is the lifeblood of any business — and allocating it effectively is integral to success.

What is flexible vs standard budget?

Static vs Flexible Budgets

Static Budget – the budget is prepared for only one level of production volume. Also called a Master budget. Flexible Budget – a summarized budget that can easily be computed for several different production volume levels. Separates variable costs from fixed costs.

This also makes budget monitoring and maintenance an easier and more collaborative process. The flexible budget model only makes it possible to compare actual expenses and budgeted expenses. With the model, it is not possible to compare budgeted revenues to actual revenues. Similarly, it is not possible to ascertain whether actual revenues are higher or lower than estimates. In order to predict how changes in costs are likely to affect output, a business must be able to identify fixed and variable costs. In this case, variable costs must appear as a percentage of the total revenue or constant rate per unit.

Tools for flexible budgeting

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. Choosing the wrong pieces of the budget to tie together can lead to significant inaccuracies in forecasts.

To determine the flexible budget amount, the two variable costs need to be updated. The new budget for sales commissions is $10,500 ($262,500 sales times 4%), and the new budget for delivery expense is $1,750 (17,500 units times 10%). These are added to the fixed costs of $12,500 to get the flexible budget amount of $24,750. A flexible budget, on the other hand, is a series of budgets prepared for various levels of activities, revenues and expenses. Flexible budgets get modified during the year for actual sales levels, changes in cost of production and virtually any other change in business operating conditions.

Advantages of a Flexible Budget:

Flexible budgeting is a way to track your expenses and see how much you’ll be spending on different things. You can use it for anything from a home business to a construction project, but here’s an example of how it works. If the factory has to use more machine hours one month, its budget should logically increase. Conversely, if it uses them for fewer hours, its budget should reflect that decline.

The flexible budget supersedes the limitations of a fixed budget. Because it is a practical approach that is suitable for dealing with real-life situations. Revenue variance is the difference between what revenue should have been for the actual production activity and what the actual revenue you take in is. It may be favorable (higher than it should have been for actual production activity) or unfavorable (lower than it should have been).

Flexible Budgets and Sustainability

A fixed budget is one that stays the same and doesn’t change based on variable costs. Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time. For example, let’s say a company had a static budget for sales commissions whereby the company’s management allocated $50,000 to pay the sales staff a commission. Regardless of the total sales volume–whether it was $100,000 or $1,000,000–the commissions per employee would be divided by the $50,000 static-budget amount. However, a flexible budget allows managers to assign a percentage of sales in calculating the sales commissions.

define flexible budget

The flexible budget will show different possibilities for variable expenses and revenue. Variable costs can include marketing and sales, and may also include the cost of materials, number of sales, and shipping costs. For example, if your production of widgets is 100 per month, your variable admin costs may be $200 per month.

Flexible Budget Advantages

All the forward-looking planning in the world can go right into left field in the face of, say, a global pandemic. Businesses of all sizes are realizing they need to be nimbler and more flexible in their planning, hence the increased adoption of rolling forecasts. Total net income changes as the amount for each line on the income statement changes. The net variance in this example is mainly due to lower revenues.

What is flexible vs rigid budget?

A fixed budget is one that stays the same and doesn't change based on variable costs. A flexible budget, on the other hand, is a more dynamic model. Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time.

A flexible budget would spot this variance, and management could take corrective actions. It might be a price increase or an effort to find cost savings in manufacturing expenses. Fixed expenses such as rent, utilities, equipment costs, and salaries usually make up a significant portion of any business budget. While it’s possible that these costs will change slightly, most businesses simply budget for them upfront. 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.

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