Flexible Budget: Basics and Advantages

What is Budgeting?

The constantly changing business environment requires the search for new competitive advantages. One of them can be highly effective planning and management of business processes of an enterprise, which allows you to rationally allocate company resources. Planning of the organization’s activities most often comes down to building a system of budgets.

Theoretically, budgeting is the process of planning various kinds of asset transactions. In its simplest form, this means planning cash receipts and payments. Depending on the degree of adaptability, there are three types of budgets: flexible, fixed, and combined, which is a blend of fixed and flexible budgets. Today, we are going to discuss a flexible budget.

Flexible budget

The market situation is practically impossible to predict accurately, therefore, for planning, several plans are prepared with different options for sales volume, prices for resources and final products. That is, they calculate the performance indicators of the enterprise for various values, key factors of activity. The versatility of planning implies flexible budgets.

A flexible budget suits changing production levels and capacities. This type of budget changes under the influence of activity level adjustments. At the same time, a fixed budget works only under a standard set of conditions, while a flexible one includes several types of budgets and is easily adjusted to the conditions.

A flexible budget is considered to be basic. It easily adjusts for plans, which are drawn up for the financial activities of the company, with different levels of production. It can be defined as a financial plan formed for any level of activity. It can be changed and adjusted depending on the release of goods. A flexible budget can be called adjustable and practical since the cost is determined at all levels of the company without any difficulties.

Drawing up this type of budget involves dividing costs into fixed and variable. Some types show the amount of costs that can be seen at each stage of the company’s activity. This type of budget is applicable to companies with non-standard production and sales levels. It is suitable for industries that are subject to external changes and market fluctuations.

Benefits of flexible budget

Flexible budgets are a useful implementation of sensitivity analysis for the planning process. In addition to the readiness of management for any direction of the development of the events, there is the possibility of a more objective analysis of variances compared to a fixed budget. The flexible budget allows you to assess compliance with target costs by comparing them with actual costs.

The flexible budget takes into account the change in costs depending on the change in the level of sales: it is a dynamic base for comparing the achieved results with the planned indicators. It serves as the link between the planned budget and the actual results achieved. This budget is drawn up after analyzing the impact of changes in the volume of sales on each type of cost.

Using a flexible budget helps in planning when choosing the optimal sales volume, and in analysis – to evaluate the actual results of the enterprise. In practice, only deviations that exceed a certain limit set by the management of the enterprise are evaluated and analyzed. Insignificant deviations, as a rule, are not taken into account and not analyzed. Significant deviations require further analysis of the deviations and the establishment of their causes.

A flexible budget tends to reflect both the need for cash flow into the business and the projected profit from sales more accurately compared to the fixed budget. However, it is known that fixed budgets are much easier to put together and are usually created even before the production process begins in the company.