Flexible budget definition

flexible budgeting definition

And because flexible budgets expand and contract in real time, they allow businesses to exist as the organic, growing entities that they are. However, some businesses may have a high level of indirect costs, making it difficult to separate fixed and variable costs from total indirect costs. Secondly, the accuracy and availability of data play a critical role in the effectiveness of a flexible budget.

  • Based on this information, the flexible budget for each month would be $40,000 + $10 per MH.
  • 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).
  • Some textbooks show budget reports with “F” for favorable and “U” for unfavorable after the variances to further highlight the type of variance being reported.
  • If the last few years have taught SaaS companies anything, it’s that sometimes uncertainty is the only certainty there is.
  • Similar scenarios exist with merchandising and manufacturing companies.

But with Mosaic’s business budgeting software, you can streamline processes and break down silos to act as a more collaborative partner to everyone in the business. With Mosaic, you can also import your financial statements from Excel, ensuring seamless integration and facilitating a more holistic view of your financial position. A flexible budget, or “flex” budget varies with changes in the amount of actual revenue earned. In its simplest form, the flex budget will use percentages of revenue for certain expenses, rather than the usual fixed numbers. This approach results in better comparability of budgeted and actual results. A flexible budget lets companies operating in a dynamic environment adjust their plans accordingly.

What are the advantages of a Flexible Budget?

SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. Secondly, relationships or formulas get established to quantify the interdependence between activity levels and expenses/revenues. These relationships consider historical data and known patterns to determine how financial metrics get influenced by changes in activity. Once the flexible budget gets established, companies can adjust it as actual activity levels deviate from the initial projections.

This allows for an infinite series of changes in budgeted expenses that are directly tied to revenue volume. This approach is more useful than a static budget, since a flexible budget responds to changes in actual revenue levels. Budgeting is an essential part of planning, financial control, and performance management.

What is Flex Budgeting?

These variances are used to assess whether the differences were favorable (increased profits) or unfavorable (decreased profits). If an organization’s actual costs were below the static budget and revenue exceeded expectations, the resulting lift in profit would be a favorable result. Conversely, if revenue didn’t at least meet the targets set in the static budget, or if actual costs exceeded the pre-established limits, the result would lead to lower profits.

This is where a flexible budget comes into play justifying the cost increase based on the actual earned revenue. A flexible budget, while much more time-intensive to create and maintain, offers an incredibly precise picture of your company’s performance. Due to the ability to make real-time adjustments, the results present great detail and accuracy at the end of the year. Once you identify A Guide to Nonprofit Accounting for Non-Accountants fixed and variable costs, separate them on your budget sheet. Flexible budgets can also be used after an accounting period to evaluate the successful areas and unsuccessful areas of the last period performance. Management carefully compares the budgeted numbers with the actual performance statistics to see where the company improved and where the company needs more improvement.

What is a flexible budget?

According to this data, the monthly flexible budget would be $35,000 + $8 per MH. A flexible budget is a budget or financial plan that varies according to the company’s needs. They made it flexible because the specific company’s or department’s needs do not remain static. If you don’t want to spend hours tracking and forecasting your budget in spreadsheets, check out our financial modeling tool. Finmark is everything you need to build an accurate, customized financial model.

flexible budgeting definition

However, if actual performance in a given month or quarter is different from the planned amount, it is difficult to determine whether costs were controlled. The flexible budget will show different https://quickbooks-payroll.org/non-profit-accounting-definition-and-financial/ 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.