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A flexible budget allows for multiple estimates for expenses and revenue, allowing for quick adjustments in response to changes in production or sales volume. This approach is useful for businesses and households in volatile circumstances.
A flexible budget is an operating budget that presents alternate estimates for multiple line items. The idea behind alternatives is that by planning for potential changes in production costs or sales volume, the business can respond quickly and keep the company profitable. Sometimes referred to as variable or dynamic budgeting, households and nonprofit organizations can also make use of this particular budgeting approach.
Like all budgets, flexible budgeting involves establishing line items that address each type of expense incurred for a given financial period. A limit or value is assigned to each line item, with the total amount of the budget coming in at slightly less than the projected revenue for that same period. Ideally, the amount allocated for each budget line item will be sufficient to cover all related expenses, and the income levels will be sufficient to allow the budget to stand as it is.
The flexible budget model is a bit different due to the built-in contingency approach that allows items to be changed quickly in the event of any unforeseen complications. For example, if shipments of raw materials are delayed and negatively impact production rates related to one or more products, it is possible to adjust the various order lines that will be affected by this slowdown in product and keep the budget balanced. If sales volume drops suddenly, affecting the amount of revenue generated, the flexible format makes it easy to quickly change the amounts associated with specific line items to reflect the new set of circumstances.
The ability to quickly adjust a flexible budget to account for changes in production levels or changes in revenue means that a business or other entity can move quickly to meet new circumstances. Conversely, a rigid budget that is based on a single set of projections and leaves no room for adjustment without going through a complicated approval process wastes valuable time and money that could be used efficiently. For this reason, businesses and nonprofits operating in somewhat volatile circumstances are more likely to use this budgeting approach.
Even households can benefit from using this type of budgeting approach. A flexible household budget would allow for sudden events such as the loss of a job, the need to replace a major appliance, or a prolonged illness of one of the major financial contributors to the upkeep of the home. Because alternative strategies can be implemented immediately, the negative impact of unforeseen events can be minimized, allowing the home to continue to function in a somewhat normal fashion.
Smart Asset.
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