define flexible budget

Recent years have illuminated how unpredictable the marketplace can be — making it increasingly challenging to create accurate budgets on a recurring basis. Revenue variance is the difference between what revenue should have been for the actual production activity and what the actual revenue you take in is. It may be favorable (higher than it should have been for actual production activity) or unfavorable (lower than it should have been).

Those siloes make flexible budgeting nearly impossible and limit the strategic value of an over-stretched finance team. But with Mosaic, you can streamline processes and break down siloes to act as a more collaborative partner to everyone in the business. For SaaS companies, flexible budgeting relates more to the cost of revenue — the actual costs for creating and delivering a product/service to customers. The cost of revenue involves hosting fees, service and cloud fees, and website development.

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Everything starts with the estimated sales, but what happens if the sales are more or less than expected? What adjustments does a company have to make in order to compare the actual numbers to budgeted numbers when evaluating results? If production is higher than planned and has been increased to meet the increased sales, expenses will be over budget. To account for actual sales and expenses differing from budgeted sales and expenses, companies will often create flexible budgets to allow budgets to fluctuate with future demand. A flexible budget can help FP&A teams more accurately forecast financial performance because it adjusts for changes in activity levels.

For control purposes, the accountant then compares the budget to actual data. No matter which type of budget model you choose, tracking your finances is what matters most. As mentioned before, this model is a much more hands on and time consuming process requiring constant attention and recalibration. For example, a company expects to make $2,000 when they produce 500 units of a product.

Flexible Budgeting FAQs

First, you determine your fixed costs, and then you add the variable costs for each unit of activity multiplied by the number of units of each activity or purchase. With a flexible budget, it’s easy to show that while costs for a month might have been much higher than budgeted, so were sales – justifying the increase. You can also study the monthly adjustments and notes to more accurately plan for future costs. Creating a flexible budget begins with assigning all static costs a fixed monthly value, and then determining the percentage of revenue to assign to your variable costs. Let us consider the following information regarding the costs expected to be incurred by a company in the upcoming accounting period. The company wants to prepare based on a scheduled activity level of 70% of the production capacity.

What is an example of a fixed budget?

Example of Fixed Budget

If the company prepares a fixed budget and it is projecting sales of $1 million, the budget for sales commissions will be fixed at $50,000. If the actual sales end up being only $900,000 the budget for sales commissions will remain unchanged at the fixed amount of $50,000.

It can also be calculated as per-unit variable cost over the per-unit sales cost, or $.75 / $3. When people know there’s not an iron-clad expectation to stay within a static line item, there’s temptation to constantly ask for more. The following steps or stages are involved in the preparation of flexible budget. That means, if efforts scale up to $15 million, then the variable portion of the costs of goods sold moves from $3 million to $4.5 million.

Definition of Flexible Budget

The number of units that can be designed at this production capacity is 7000. In a flexible budget, there is no comparison of budgeted to actual revenues, since the two numbers are the same. The model is designed to match actual expenses to expected expenses, not to compare revenue levels.

There are several great tools available online that make budgeting a breeze. Flexible budgets do not fix variances, they help to better plan for the future. Revenue is still calculated at month end so costs cannot be retroactively adjusted. This is where a flexible budget comes into play justifying the cost increase based on the actual earned revenue.

Best Practices for Flexible Budgeting in FP&A

In conclusion, the budget that companies can prepare for multiple output levels is a Flexible Budget. Practically, managers widely use this type of budget as it is the most realistic one. Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams. As traffic to the company’s site increases, hosting costs likewise increase.

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