Flexible Budget in Accounting: Definition, Examples & Creation

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. Use your design system and custom components in our drag-and-drop builder to create stunning websites, landing pages, and digital experiences. A flexible mindset acknowledges this uncertainty and prepares you to adjust with confidence. Whether you’re facing a crisis or seeking urgent funding, an what is a flexible budget emergency business plan can help you act quickly….

Flexible Budgets Versus Static Budgets

Then, you’ll include your variable costs and determine the percentage of the actuals. As such, as the revenues and expenses vary, the budget percentage used will provide a different budget output. This type of budgeting system works by taking a percentage of revenues and expenses and creating a budget based on that.

Define activity levels

A key tool can come into play to help navigate these uncertainties and make better informed decisions – the flexible budget. The adaptive nature of flexible budgeting implies a constant need for monitoring and adjustment. Unlike static budgeting, which is set once and used as a reference throughout the period, flexible budgeting requires periodic reviews. This process consumes more time and effort from the finance team, who must remain vigilant to market fluctuations and company performance.

Real-Time Variance Analysis

The primary distinction between flexible and static budgets lies in their adaptability. A static budget remains fixed throughout the budget period, regardless of actual activity levels, while a flexible budget adjusts to reflect real-time changes. Conversely, a flexible budget adjusts automatically to different activity levels. Using the same example, if a company produces 12,000 units instead of 10,000, a flexible budget recalculates expected revenues and variable expenses for 12,000 units. This recalculation allows for a more meaningful comparison of actual results to what should have been spent or earned at the actual activity level. This adaptability helps isolate the impact of volume changes from other operational efficiencies or inefficiencies.

Definition and Purpose of Budgets

Understanding the flexible budget format and seeing it in practical action can help businesses better manage their resources and anticipate financial outcomes. The main features of a flexible budget include scalability, responsiveness, and continuous alignment with organizational objectives. A flexible budget typically uses formulas or budget models that link each cost category to levels of business activity. Variable costs, such as raw materials and production labor, are recalculated automatically whenever sales or output levels change. Meanwhile, fixed costs remain constant, providing clarity between controllable and uncontrollable expense categories. This clear delineation greatly benefits business owners who need to rapidly analyze unit margin changes or pinpoint inefficiencies as conditions shift.

• With industry-specific templates, Limelight simplifies the creation of flexible budgets tailored to your unique business needs.
• Managers are busy and companies need to operate, spending too much time on developing a budget may not be feasible in all instances.
• This responsive approach allows for more accurate financial forecasting and better resource allocation, aligning expenses closely with operational activity.
• 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.
• This adaptability transforms it from a mere planning document into a powerful analytical tool, particularly for performance evaluation and cost control.

It indicates the government will not run out of their tax revenues and other incomes in that year. Based on the relationship between estimated incomes and expenses, budgets can be categorized into surplus, balanced, and deficit. Changes in relevant factors, such as economic conditions, will cause changes in these assumptions, and the original budget might not be appropriate anymore. Attract top talent with frictionless recruiting tools and create lasting first impressions with personalized onboarding experiences. Manage job postings, track candidates and set new hires up for success — all in one intuitive platform.

Flexible vs. static budgets

This adaptability allows management to evaluate performance more accurately by comparing actual results to a budget that reflects the true level of activity achieved. When preparing a flexible budget, managers are forced to consider the different scenarios and their responses to them. Thus, for a number of different situations, managers will have calculated their costs and revenues.

• By doing so, businesses can avoid making decisions based on faulty data, which could lead to misguided strategies.
• You can use it for anything from a home business to a construction project, but here’s an example of how it works.
• It is useful for both planning purposes and control purposes and is generally used to estimate factory costs and operating costs.

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. Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced.

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By breaking down the overall variance into these specific components, management gains a much clearer understanding of why performance differed from expectations. This granular insight is critical for effective management intervention and continuous improvement. This adaptability is crucial for accurate financial management and strategic decision-making.

In this method, you list all our income and expenditure items separately and then add them up to get our total income and expenditure. A flexible budget also allows for more creativity with how you spend money and saves time by not requiring constant monitoring of your spending habits and trends. With a flexible budget It’s easy to make adjustments when necessary, so that you can stay within your spending limits and still buy what you need. According to this data, the monthly flexible budget would be $35,000 + $8 per MH. A static budget stays at a single amount regardless of how much activity there is. Account expenses that exceed the company’s revenue fall under the Intermediate Flexible Budgeting.