If such predictive planning is not possible, there will be a disparity between the static budget and actual results. In contrast, a flexible budget might base its marketing expenses on a percentage of overall sales for the period. That would mean the budget would fluctuate along with the company’s performance and real what is a flexible budget costs. The ability to provide flexible budgets can be critical in new or changing businesses where the accuracy of estimating sales or usage my not be strong. For example, organizations are often reporting their sustainability efforts and may have some products that require more electricity than other products.
If the machine hours in February are 6,300 hours, then the flexible budget for February will be $103,000 ($40,000 fixed + $10 x 6,300 MH). If March has 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). 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.
Why Use a Head Shaver?
A static budget helps to monitor expenses, sales, and revenue, which helps organizations achieve optimal financial performance. By keeping each department or division within budget, companies can remain on track with their long-term financial goals. A static budget serves as a guide or map for the overall direction of the company.
A sophisticated flexible budget will change the proportions for these expenditures if the measurements they are based on exceed their target ranges. 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.
Stick To Your Budget
Creating a flexible budget begins with assigning all static costs a fixed monthly value, and then determining the percentage of revenue to assign to your variable costs. 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. However, if your production of widgets is 200 per month, your variable admin costs would increase to $400.
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. For example, costs like rent, debt repayments, or PP&E are likely to remain fixed and consistent. Flexible budget variance is any difference between the results generated by a flexible budget and actual results from following that budget.
4 Prepare Flexible Budgets
Celebrate financial milestones to motivate continued adherence to your budgeting plan without compromising your long-term goals. Creating a budget that accounts for income fluctuations is vital for those with variable incomes. Estimate your average income based on past earnings and plan your expenses accordingly. Always err on the side of caution by underestimating income and overestimating expenses. Choose a budgeting tool that suits your lifestyle, whether a simple spreadsheet, pen and paper, or a sophisticated budgeting app.
A flexible budget lets you adjust to global trends and economic changes rather than trying to anticipate when those will happen (and likewise brace for their impact). Predicting your costs ahead of time is a great way of controlling them. Since a flexible budget empowers the finance team to think ahead and rein in spending under certain scenarios, it gives the finance team much more robust cost controls.