Flexible Budget: Management Method for Cost Control and Monitoring the Performance of Economic Entities: Business & Management Book Chapter

An inflexible household budget can lead to a lot of stress if an unexpected cost arises. Even households can benefit from using this type of approach to budgeting. Because the alternative What Is a Flexible Budget? strategies can be implemented immediately, the negative impact of unforeseen events can be minimized, allowing the household to continue functioning in a somewhat normal manner.

• The model is designed to match actual expenses to expected expenses, not to compare revenue levels.
• Thus it becomes difficult for the experts to prepare Flexible budgets.
• Formulating and administering a flexible budget is no easy task given that most costs in a business are rarely variable.
• It also works for businesses that belong to industries that are highly influenced by external factors.
• Understand how flexible budgets are used to evaluate performance.

The static budget is different from the flexible budget as it is a budget which stays fixed. It does not consider the possible fluctuations or changes in the costs. The amounts listed on this budget do not change, despite any other changes taking place.

What is flexible budgeting?

For example, a company may decide to use 10% of its revenue for marketing purposes. The company can then create a flexible budget to allocate 10% of its earned revenue instead of a specific fixed amount. Budgeting is an important part of business finances as well as personal finances. While the general concept of budgeting may be the same, it can be used for many different purposes.

As variables change over time, for instance, variations in raw material prices, the flexible budget is able to consider these changes, make adjustments and compare them with actual results. The flexible budgeting approach helps to narrow the gap between actual results and standards due to activity level changes. Instead of estimating production levels, use the actuals from the previous month to create your flexible budget. For instance, if your company produced 50,000 units in January, and you want to budget for 75,000 units in February, you have to look at your variable costs. Big Bad Bikes is planning to use a flexible budget when they begin making trainers.

Flexible budget definition

They then allow for fluctuating variable costs, reviewing costs periodically to make real-time adjustments. The flexible budget illustration for Mooster’s Dairy was prepared after actual production was known. While this tool is useful for performance evaluation, it does little to aid advance planning. But, flexible budgets can also be useful planning tools if prepared in advance. For instance, Mooster’s Dairy might anticipate alternative volumes based on temperature-related fluctuations in customer demand for ice cream.

“From there, you can drill down and get o multiple layers of complexity,” he said. Michael McFall, co-founder and co-CEO of Biggby Coffee and author of Grind, a new guide for entrepreneurs looking to build self-sustaining businesses, sees potential for too much wiggle room. Brainyard delivers data-driven insights and expert advice to help businesses discover, interpret and act on emerging opportunities and trends.

What Is a Flexible Budget for Small Business?

Companies develop a budget based on their expectations for their most likely level of sales and expenses. Often, https://simple-accounting.org/ a company can expect that their production and sales volume will vary from budget period to budget period.