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A flexible budget is an operating budget that features alternative estimates for various line items. The idea behind the alternatives is that by planning for potential changes in production costs or sales volume, the business can respond quickly and keep the company profitable. Sometimes referred to as a variable or dynamic budget, households and non-profit organizations can also make use of this particular approach to budgeting.
Like all budgets, the flexible budget involves the establishment of line items that address each type of expense incurred for a given financial period. A limit or value is assigned to each line item, with the total amount of the budget coming to something less than the anticipated income for that same period. Ideally, the amount allotted for each budgetary item will be sufficient to cover all related expenses, and the income levels will be sufficient to allow the budget to stand as is.
The flexible budget model is a little different because of the built-in contingency approach that makes it possible to quickly amend the line items in the event of some unforeseen complication. For example, if shipments of raw materials are delayed and adversely affect the rates of output related to one or more products, it is possible to adjust the various line items that will be affected by this slowdown in product, and keep the budget balanced. Should sales volume suddenly drop, affecting the amount of generated revenue, the flexible format makes it easy to quickly change the amounts associated with specific line items to reflect the new set of circumstances.
The ability to quickly adjust a flexible budget to take into account changes in output levels or shifts in income means that a business or other entity can move quickly to meet the new circumstances. By contrast, a rigid budget that is based on a single set of projections and allows no room for adjustments without going through a complicated approval process wastes valuable time and money that could be used for efficiently. For this reason, businesses and non-profit organizations that function in somewhat volatile circumstances are very likely to employ this approach to budgeting.
Even households can benefit from using this type of approach to budgeting. A flexible budget for the home would allow for sudden events like the loss of a job, the need to replace a major appliance, or an extended illness of one of the major financial contributors to the upkeep of the household. Because the alternative 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.
Crispety-I think that a static budget vs. a flexible budget are different in many ways, but both of these types of budgets need to be taken into consideration in order to pay fixed expenses and have additional funds for unexpected expenses.
The fixed expenses are known expenditures that we should try to reduce somewhat year after year. This allows more flexibility in case we need to spend extra money.
Sometimes we may have an activity based flexible budget that we would like to add in order to provide more customer outings in order to increase sales revenue.
While this expenditure can be measured it is something new that we had to add to the budget in order
to retain the customers that we have and expand our customer base to add new ones.
All of these budgets have to coincide with the gross margin of the company which is the profitability of the company.
If the company is not profitable, then they have to reduce their expenses and maybe eliminate the entire flexible budget until they get their expenses under control. This is the main difference between the fixed and flexible budgets.
A fixed budget and flexible budget are diametrically opposed. A fixed budget offers a calculated monetary amount for each category month after month.
However, when you calculate a flexible budget you leave room for unforeseen circumstances or emergencies.
In order to calculate flexible budget variances it is best to track all expenditures for a year and determine the percentage of dollars that were needed to be spent outside of the fixed budget.
A budget software should be able to give you these figures so if your variance was 5% for the year, you can pad each month by 5% in order to cover any budget variances.
This flexible budget variance analysis will help you become more accurate year after year with respect to your budget.