What Is Flexible Budgeting? Tips & Example

SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. Imagine a retail store that creates a flexible budget for its monthly operating expenses. The store’s fixed costs, such as rent and salaries, remain constant at £10,000. Additionally, variable costs, like inventory and utilities, are projected at £5,000 for an assumed activity level of 1,000 customers. At Ramp, we understand the importance of adaptability in today’s fast-paced business environment. Fixed costs remain constant regardless of your business activity levels.

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After each month (or accounting period) closes, a flexible budget assumes you’ll compare projected revenue to actual results and adjust the next month’s expenses accordingly. 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. For example, imagine a manufacturing company where the cost of producing each unit decreases as production volumes increase due to economies of scale. A flexible budget would reflect these changing costs, offering a more accurate representation of financial performance and helping the company make better-informed decisions. Flexible budgeting is designed to dynamically adapt to variations in business activity, ensuring that financial planning is always aligned with the company’s operational reality.

They prepare a flexible budget to account for different sales volumes during the year. During a peak season, they sell 5,000 units, and during off-season, they sell 2,000 units. By continuously adjusting to reflect current conditions, you can allocate resources where they are needed most.

Rusinak suggests a similar mindset when deciding whether to borrow for other goals. Each type of tax-advantaged account is made for a specific purpose and may come with pros and cons. Ultimately, Fidelity recommends saving at least 15% of your yearly pre-tax salary for retirement, which includes any employer contributions.

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And with out-of-the-box metrics, templates, and dashboards like the forecast vs. actuals dashboard, you can shorten the budget allocation and planning process from two weeks down to two days. These points make the flexible budget an appealing model for the advanced budget user. However, before deciding to switch to the flexible budget, consider the following countervailing issues. These budgets are different in different levels of activities, which facilitate the ascertainment of fixation of cost, selling prices, and tendering of quotations.

Regularly review variances to refine your budget and improve forecasting accuracy. 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. All of these budgets have to coincide with the gross margin of the company which is the profitability of the company. This way, managers can make decisions based on financial information that matches the current state of the business. In the case of a typical business, if it is newly started, it becomes tough to predict the demand for the products/services accurately.

Collect actual results data

In a basic flexible budget, finance can build a percentage into the basic model, which they multiply by actual revenues to determine the expenses at a specified revenue level. It doesn’t provide the full level detail that a flexible budget would, but it does provide flexibility and a more accurate, up-to-date budget than a static budget. As you can see, the flexible budget adjusts the expected food expenses based on a higher cost per customer, resulting in an extra $1,500 in the overall budget. This allows the restaurant to better manage its expenses and make informed decisions about future pricing and menu offerings, seizing the opportunity of the increase in customers to make a higher profit. Though time-intensive to prepare, an advanced flexible budget provides the most precise insight into financial performance.

But to really fall into strategic finance and budgeting, rather than asking if your budget should be flexible or static, incremental or strategic, you should focus on what line items you can forecast with a flexible method. More than likely, specific sections of your balance sheet or income statements could benefit from a bit more flexibility. Thus, if the actual expenses exceed $8,880 by $X in the month with an 80% activity level, it would mean that the company has not saved any money but has overspent $X more than the budgeted amount. Budgetary control is the comparison of the actual results against the budget. Where the actual level of activity is different from that expected, comparisons of actual results against a fixed budget can give misleading results.

Business resources

There are 2 keys to achieving financial freedom, according to Rusinak. First, you have a good understanding and control over the necessary expenses in your life, like food, housing, and bills—and saving for your future. “It’s also important to set aside a little money for fun and entertainment, or your shoestring budget may feel too restrictive to maintain,” Vernace says.

GOP leaders and the Trump administration want to use a “current policy” baseline so that the $4 trillion-plus cost of extending the 2017 tax cuts permanently doesn’t need to be offset to meet reconciliation targets. But Sen. Mike Rounds, R-S.D., said he thought the House budget cuts ultimately would prove unpalatable even to House members, and that a compromise would largely mirror the Senate’s version in terms of cost savings. Political realities in both chambers may dictate a higher level of spending cuts. But for now, at least the committees on both sides of the Capitol could get to work.

Benefits of Flexible Budgets

And don’t forget to congratulate yourself on a job well done when you meet your goals. You might even build tiny splurges into your budget as small rewards. Whether you’re facing a crisis or seeking urgent funding, an emergency business plan can help you act quickly…. For a lot of people, the balance sheet is one of the hardest financial statements to get to grips with. 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. Over the years, we’ve refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills.

“Start by gaining a clear picture of your income and expenses. Begin small by tracking your spending meticulously, and be prepared to adjust your plan as you learn more about your financial habits,” Porter says. “The key is to build discipline over time and ensure that every dollar is working towards your financial goals.” Flexible payments allow customers to select the method and timing of their payments for purchases. They include options like “Buy Now, Pay Later” (BNPL), enabling you to buy items immediately and pay in interest-free installments, to pay off the balance in 30 days, or to spread costs a flexible budget over an extended period.

A flexible budget can be found suitable when business conditions are constantly changing. Accurate estimates are expected if the resources are available with the experts. A big organization should hire experts to prepare a flexible budget and to help their organization make a clear vision about what output should be produced to achieve the targeted profit.

A fixed budget is one that stays the same and doesn’t change based on variable costs. Flexible budgets change based on fluctuations with variable costs and have the ability to expand or contract in real time. The advantage to a flexible budget is we can create a budget based on the ACTUAL level of production to give us a clearer picture of our results by comparing the flexible budget to actual results. This analysis would compare the actual level of activity so volume variances are not a factor and management can focus on the cost variances only. When sales fluctuate or unexpected expenses arise, a flexible budget adjusts accordingly.

As a result, the company gains not only in efficiency but also in adaptability, two essential pillars for sustainability and growth in today’s business environment. Leed Company’s manufacturing overhead cost budget at 70% capacity is shown below. Leed can produce 25,000 units in a 3 month period or a quarter, which represents 100% of capacity. Join over 25,000 businesses that trust Ramp to streamline their finance operations and improve resource allocation.

Unlike static models, this type of budget adjusts to changes, providing a more realistic view of expected costs and revenues. This includes revenue, expenses, and the key activity metrics you defined earlier. Accurate data collection is vital for making real-time adjustments to your budget.

If March has 4,100 machine hours, the flexible budget for March will be $81,000 ($40,000 fixed + $10 x 4,100 MH). A flexible budget is a budget that adjusts for changes in the level of activity or output. This makes the budget more up to date and accurate by keeping in mind unpredictability as much as possible. 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. For SaaS companies, flexible budgeting relates more to the cost of revenue — the actual costs for creating and delivering a product/service to customers.

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