Flexible Budgets for Small Businesses Explained in Under 5 Minutes

Definition and Examples of Flexible Budgeting

A flexible budget is a budget that changes based on your actual production or revenues. Unlike a static budget, it adjusts the original budget expectations using your actual sales or actual revenues. A flexible budget is an important tool for most small businesses. Learn how this budget can help meet market challenges.

How Flexible Budgets Work

A flexible budget starts by identifying your fixed expenses. Fixed expenses such as rent, utilities, equipment costs, and salaries make up a large part of any business budget. While these costs may vary slightly, most businesses will budget them in advance.

The flexible budget presents different scenarios for variable expenses and revenues. Variable costs may include marketing and sales, and it may also include materials costs, sales volume, and shipping costs. The flexible budget will have lines for different amounts. For example, if your unit production is 100 per month, your variable management costs might be $200 per month. However, if your unit production is 200 per month, the variable management costs will increase to $400.

Next, the flexible budget will look at revenues based on the number of units sold and the selling price. Changes in any of these factors can affect your total revenue. For example, your flexible budget might have three columns showing the number of units sold, the selling price, and the total revenue.

Advantages and Disadvantages of Flexible Budgets

Flexible budgets can be extremely helpful, but they also have some drawbacks.

Advantages:

• Real-time responsiveness to changes: Flexible budgets allow businesses to quickly respond to events that affect variable costs and profits. In contrast, static budgets will always become outdated as they are, by nature, non-adjustable.
• Adjusting only variable costs: Since the flexible budget requires careful analysis of variable and fixed costs, it’s easy to ensure that unexpected changes only impact variable costs.
• Creating a hierarchy: Since the flexible budget is based on a fixed cost per unit, it is possible to adapt quickly to changes without affecting the organization’s ability to produce on time and within budget.

Disadvantages:

• Calculation difficulties: If you have a complex business, it may be challenging to calculate and manage a flexible budget.
• Need for managing a variable budget: Since your budget is always changing, it may be difficult to compare actual budget to planned budget.
• May not apply to your business: If your company has few variable costs, using a flexible budget may be an unproductive exercise. For example, if you are a consultant, your costs entirely depend on either fixed or travel costs that are paid by your clients.

Key Takeaways

Flexible budgets produce in real-time to account for revenue changes based on changes in the number of units sold or selling price. Flexible budgets are usually produced monthly or quarterly, rather than being set in advance like static budgets. The flexible budget is not suitable for every type of business.

Source: https://www.thebalancemoney.com/what-is-a-flexible-budget-for-small-business-5216804