What is a Flexible Budget?
Flexible budget is a budget or financial plan that varies according to the company’s needs. A flexible budget may refer to a whole company or department. The designers of the budget made it flexible deliberately. They made it flexible because the specific companies or departments’ needs do not remain static; this type of budget contrasts with a static budget which stays as a single amount regardless of how much activity there is.
The gap between a scheduled and actual budget amount is known as a budget variance. By examining budget deviations, will reveal the cause of failure. It aids in identifying patterns that will generate more profit. At least once per quarter, you should do a budget analysis, and it should be done every week if the market changes due to a crisis like COVID-19.
A budget variance might be beneficial and detrimental. A suitable one is a budget amount that is beneficial to the company. Expressed, this suggests there was more money than planned or that expenses would be lower than predicted. A favorable budget variation benefits the company, whereas an unfavorable budget variation hurts the company.
Positive Budget Variance
A positive company budget variance should not be viewed quickly and rejected just because it is positive. It’s critical to understand what makes operations more successful. This way, you can maintain and improve your driving power. Inaccurate planning, market shifts, state of charge, staff fraud, and cost changes are all possible reasons for adverse budget variations.
It might be time to keep a closer eye on your company strategy and change it if necessary. Customer service may need to be improved, or a new sales channel may need to be implemented.
Changes in the market may occur, and increasing competition may have a negative impact on your existing customers. Employee fraud does occur tragically. This is something that you want to be aware of and know how to prevent. Expense reports, for example, are ripe for employee fraud.
There’s always room for improvement in your budget. Make sure you have policies in place to deal with this. Furthermore, you may have seen an increase in prices as a result of supplier pricing increases. It would be best if you attempted to bargain with your suppliers on pricing. Reducing variable expenses to fixed expenses is another smart step to undertake.
Importance of Flexible Budget
This might help you save money on other things. Take a close look at your operations’ procedure. Is there anything that might do better? Simplifying the process and making things more efficient could help you reduce the budget variation.
You must be able to avoid the waves of business. It’s also crucial to determine whether or not you’ll achieve your objectives. Implementing a dynamic spreadsheet customized to your firm or using dashboards are both efficient ways to track budget deviation. Remove the amount spent for each line item to arrive at a budget variance. Multiply by 100 to get a percentage.
Budget variances are utilized to increase the efficiency of a company’s operations. It enables you to look into your income to see where you are. It’s also a year-end prediction that’s spot on. It indicates the company’s performance.
Budget variance analysis has the capability to boost additional revenue. You’ll need a budget variance to build the budget for the next year. If you don’t know how to construct a budget variance, try buying software or paying a financial professional to do it for you.
Example of Flexible Budget
let’s imagine that a manufacturer has determined what is electricity and supplies costs are for the factory it requires eight dollars per MH machine hour the company also knows that the depreciation supervision and other fixed costs come to be about $35,000 per month.
Its production equipment operates on average between 3500 and 6500 hours per month according to this data the monthly flexible budget would be thirty-five thousand dollars plus eight dollars per machine hour
let’s suppose the production machinery had to operate for 4,500 hours during February their flexible budget for that month would be thirty-five thousand dollars plus eight times four thousand five hundred dollars which adds up to be seventy-one thousand dollars
But what if the production machinery has operated with five thousand hours in March their flexible budget for that month would be thirty-five thousand dollars plus eight times five thousand dollars which adds up to 75 thousand dollars
If a factory has to use more machine hours one month its budget should logically increase conversely if it uses them for fewer hours. Its budget should reflect that decline. Most companies that have variable business costs each month or quarter have flexible budgets manufacturing company’s restaurants and hotels typically use flexible budgets. Flexible budgets provide a better opportunity for planning and controlling than does a static budget.
If you’re a small business owner, hiring virtual budgeting services provider will help you a lot as they are experts and they are also cost-effective as compared to hiring a CPA on a high salary.