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Consider the resources needed to maintain a flexible budget against the potential advantages. If your business environment is stable with predictable costs and revenues, a static budget might suffice. However, if you operate in a dynamic market, the benefits of real-time adjustments and accurate performance evaluations may outweigh the costs.

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Companies around the globe experienced this in March 2020 when the COVID-19 pandemic required lockdowns that grounded much of the economy to a halt. Models and projections were scrapped, and companies that had spent a lot of time and resources on creating a flexible budget saw huge amounts of their time and effort invalidated. Flexible budgets are efficient because they do all the work while you’re working on the budget. While this results in a longer initial budget time, it makes for a much faster overall budgeting process, since you (ideally) don’t need to re-forecast scenarios or calculate new projections. Say a company’s paid advertising channel is performing well and generating more revenue than was expected. A flexible budget gives the company the green light to reinvest more of that revenue back into the channel.

Methods for Flexible Budgeting

For semi-variable costs, combine a fixed component with a variable component. These formulas allow you to adjust your budget dynamically as activity levels change. A fixed budget is one that Accounting For Architects stays the same and doesn’t change based on variable costs.

Advantages of flexible budgeting

The difference between your projected and actual figures gives you the flexible budget variance, an essential metric to understand how well your predictions align with your actual performance. The benefit of a flexible budget is that it provides a more accurate picture of a business’s performance by adjusting for changes in activity levels. This can help businesses make better decisions about their operations, identify areas where they can improve efficiency or reduce costs, and better plan for future growth. In its simplest form, the flex budget uses percentages of revenue for certain expenses, rather than the usual fixed numbers.

• Financial forecasting software is well-suited for managing flexible budgeting.
• Let’s go over them in order from the simplest type to most advanced.
• For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
• And if you’d like to create a flexible budget for your organization, Prophix can help.
• Consequently, the categorization of cost takes place under Fixed, Variable and Semi-variable.
• By adjusting budgeted amounts based on actual activity levels, you can pinpoint where costs are deviating from expectations.

Provides Optimal Usability in Variable Cost Environments

For control purposes, the accountant then compares the budget to actual data. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.

• The Finmark Blog is here to educate founders on key financial metrics, startup best practices, and everything else to give you the confidence to drive your business forward.
• Let’s look at an example of a flexible budget to better understand how it works.
• Revenue is constantly changing and is the most important factor in business decisions, but the intermediate flexible budget includes costs that vary based on other activity measures.
• However, this approach ignores changes to other costs that do not change in accordance with small revenue variations.
• Let’s face it  – business moves fast, and we have to be flexible for what is thrown at us.

Flexible budgets are dynamic systems which allow for expansion and contraction in real time. They take into account that a business is an organic, growing system and that life is not predictable. We’ve bookkeeping and payroll services 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. The advanced budget, on the contrary, takes into consideration the expected variations and ranges of differences in expenses to be incurred.