Secondly, a flexible budget aids in scenario planning and decision-making by enabling companies to assess the financial impact of changing business conditions. Through the ability to adjust the budget to reflect various scenarios, organizations can evaluate potential outcomes and make informed strategic choices. This capability empowers management to anticipate the financial implications flexible budget meaning of alternative courses of action. Due to its flexibility and response to marketplace and company changes, flexible budgeting requires ample attention. The disadvantages of flexible budgeting include its time-consuming nature, lack of accuracy, and delays in processing. Let us see a few examples of how to calculate flexible budgets and how to perform variance analysis.
Then, it must budget how many sales in units it needs to make to meet the sales budget and meet-ending inventory requirements. Most companies have an ending inventory they want to meet every month or quarter so that they don’t stock out. For example, under a static budget, a company would set an anticipated expense, say $30,000 for a marketing campaign, for the duration of the period. It is then up to managers to adhere to that budget regardless of how the cost of generating that campaign actually tracks during the period. More than likely, specific sections of your balance sheet or income statements could benefit from a bit more flexibility. It provides insights into how well an organization has managed its finances in response to changing conditions and activity levels.
Pandemic Budget: 70% Capacity
It gives a firm a broad overview of its finances and is often used as a central planning tool. If you don’t know these and if you don’t have the time or intention to update your budget frequently, then it’s best to go with a static budget. Of course, if you have the means in the future, you can use both budgets to benefit from their advantages. But I think that for a small business that’s just starting out, a static budget will work.
- For control purposes, the accountant then compares the budget to actual data.
- Most companies have an ending inventory they want to meet every month or quarter so that they don’t stock out.
- In this article, we explore how companies approach budgeting as well as how companies deal with missing their budgets.
- While this isn’t a reason to avoid flexible budgeting altogether, it’s good to keep in mind as you consider how and when to implement this kind of budgeting strategy.
- A static budget serves as a guide or map for the overall direction of the company.
- In addition, a flexible budget can successfully justify increases in costs when compared to actual income.
The expenses that do not change are the fixed expenses, as shown in Figure 10.25. A flexible budget, on the other hand, separates fixed and variable costs and can adjust based on different production outputs. Choosing the appropriate types of budgets for businesses is also dependent on how great the level of variance actually is in terms of increased or decreased profits. This variance is directly affected by the nature of expenses as well, which can be fixed or fluctuating in nature. A static budget approaches variance by trying to work in excess resources beforehand for any possible changes in demand down the road, and can therefore lead to issues with inventory.
