A static budget is one that is prepared based on a single level of output for a given period. A flexible budget starts with fixed expenses, then layers a flexible budgeting system on top that allows for any fluctuation in costs. Most flexible budgets use a percentage of projected revenue to account for variable costs. This way, budget adjustments can happen in real time while taking into account external factors like economic shifts and rising competition. A company makes a budget for the smallest time period possible so that management can find and adjust problems to minimize their impact on the business.
For example, Figure 10.26 shows a static quarterly budget for 1,500 trainers sold by Big Bad Bikes. Variable costs are usually shown in the budget as either a percentage of total revenue or a constant rate per unit produced. Flexible budgets take time to maintain, with routine monthly reviews and edits. It’s also important to request accountability for all changes flexible budget meaning made to this budget in order to keep it working for you. Mosaic eliminates silos by connecting to your ERP, CRM, HR system, and billing systems to centralize financial data from across departments. You can access automated customer, account, and department mapping to ensure your variance reports can get to the most granular level with just a few clicks.
How to Set a Flexible Budget
Its estimations of sales and sales price will likely change as the product takes hold and customers purchase it. Big Bad Bikes developed a flexible budget that shows the change in income and expenses as the number of units changes. It also looked at the effect a change in price would have if the number of units remained the same. The expenses that do not change are the fixed expenses, as shown in Figure 7.23. A flexible budget flexes the static budget for each anticipated level of production. This flexibility allows management to estimate what the budgeted numbers would look like at various levels of sales.
As mentioned before, this model is a much more hands on and time consuming process requiring constant attention and recalibration. Flexible budgets work by taking the pressure off to predict future happenings. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. If the factory has to use more machine hours one month, its budget should logically increase. Conversely, if it uses them for fewer hours, its budget should reflect that decline. Its production equipment operates, on average, between 3,500 and 6,500 hours per month.
