With flexible budgets, it’s easy to make updates to revenue and activity figures that haven’t been finalized. Because of these seamless workflows (and because of the inherent adaptability), flexible budgets give way to more efficiency than their fixed budget counterparts. Most flexible budgets use a percentage of projected revenue to account for variable costs rather than assigning a rigid numerical value at the start.
Pros and Cons of Flexible Budgets
And because flexible budgets expand and contract in real time, they allow businesses to exist as the organic, growing entities that they are. Instead, the hope is that patterns will be observed making future cost planning easier and more accurate. In addition, a flexible budget can https://thearizonadigest.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ successfully justify increases in costs when compared to actual income. Revenue and cost needs to be compared monthly and adjustments or notes should be made. Additionally, flexible budgets have a lack of accountability to some degree since they are so fluid and open to change.
- For control purposes, the accountant then compares the budget to actual data.
- The actual revenue the widget company is taking in has doubled—but the production costs would also go up.
- With flexible budgets, it’s easy to make updates to revenue and activity figures that haven’t been finalized.
- The expenses that do not change are the fixed expenses, as shown in Figure 10.25.
- And if you’d like to create a flexible budget for your organization, Prophix can help.
- Unlike a static budget, which is based on a fixed level of activity or output, a flexible budget is designed to be adaptable to changes in sales volume, production volume, or other measures of business activity.
Step Cost Development is Time-Consuming
The flexible budget at first appears to be an excellent way to resolve many of the difficulties inherent in a static budget. However, there are also a number of serious issues with it, which we address below. Expenditures may only vary within certain ranges of revenue or other activities; outside of those ranges, a different proportion of expenditures may apply.
Insights for next-gen finance leaders
However, it can also lead to scalability challenges if the sales and customer success teams aren’t able to handle more accounts than were “budgeted” for. A robust flexible budget will have a plan for these scenarios and allocate funds accordingly. Flexible budgets are best used for startups that have a number of variables such as manufacturing, and others that have revenue based on seasonality, as costs are directly impacted by demand. We’ve previously covered the five different types of budget models that businesses can choose from. The flexible budget offers the most customizable experience, allowing it to be easily adopted by many different businesses.
Benefits of having a flexible budget for your small business
There were direct variable costs for materials $0.80, labour $1.00, overhead $0.50 and selling and administration $0.50. There were also fixed costs of $25,000 related to the factory and $25,000 related to selling and administration. A fixed budget is one that stays the same and doesn’t change based on variable costs.
- While flexibility is great, sometimes something unexpected happens that invalidates all the work you did before.
- Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time.
- A flexible budget adjusts for changes in activity levels for all costs, including both fixed and variable costs.
- Those siloes make flexible budgeting nearly impossible and limit the strategic value of an over-stretched finance team.
- It also knows that other costs are fixed costs of approximately $40,000 per month.
- Even if a cost is assigned a numerical value, a monthly review of costs compared to revenue allows that number to be changed for future periods.
Static versus Flexible Budgets
Expenses such as rent, management salaries, and marketing costs remain static and do not change based on production. Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams. But to really fall into strategic finance and budgeting, rather than asking if your budget should be flexible or static, incremental or strategic, you should focus on what line items you can forecast with a flexible method. 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.
The 3 Levels of Flexible Budget
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. Crush complexity, reduce uncertainty, and illuminate data with access to best-in-class automated insights and planning, budgeting, forecasting, reporting, and consolidation functionalities. Prophix is a private company, backed by Hg Capital, a leading investor in software and services businesses.
Accounts for unforeseen expenses
Flexible budgets calculate, for example, different levels of expenditure for variable costs. Subsequently, the budget varies, depending on the activity levels that the company experiences. Such a budgeting method is particularly useful for businesses with fluctuating sales cycles, allowing them to align their spending more closely accounting services for startups with their actual income. In Chapter 9, Using budgets to evaluate performance, we discussed the idea of a flexible budget – the restating of our original budget, but using the sales quantities that were actually recorded. The first is the static budget – our original budget – labelled static because it does not move or change.