Flexible Budget Variance Example

“Simply understanding where your money is going can help you feel more confident about your finances,” Rusinak says. He uses a spreadsheet to track all his monthly spending across categories like food, housing, transportation, and utilities. While adding work requirements to the safety-net program would be fine, Hawley said, he took issue with possibly requiring states to cover more of the cost of Medicaid. “Beyond work requirements, if it’s something that results in reductions in benefits to folks who depend on it and who are qualified and are working, I’m not going to vote for that. Still, the expectation was that Senate committees would achieve well above that figure, in order to fully offset a $340 billion-plus border and defense spending package. This can be done through the Klarna app or by contacting Klarna customer support.

That’s because flexible budgets require continual upkeep and maintenance — you’re constantly having to keep an eye out for fluctuations and then execute those changes as quickly as you can. While this isn’t a reason to avoid flexible budgeting altogether, it’s good to keep in mind as you consider how and when to implement this kind of budgeting strategy. If your company regularly conducts a flux analysis, syncing this process with your flexible budget creation can help save time. Now, between 85% and 95% of the activity level, its a flexible budget is semi-variable expenses increase by 10%, and above 95% of the activity level, they grow by 20%. Prepare a flexible budget for the three scenarios wherein the activity levels are 80%, 90%, and 100%. When preparing a flexible budget, managers are forced to consider the different scenarios and their responses to them.

Flexible ways to pay

Planning for unexpected expenses and saving for retirement are critical to the journey. Since income is the other side of financial freedom, finding ways to earn more can help you reach that goal. “The higher your income versus expenses, the more financially secure you’re going to feel,” says Rusinak. For some people, building up income may be a bigger priority than cutting spending—after all, spending can only be cut so far.

• This adaptability allows flexible budgets to offer a precise picture of company performance, seeing as they’re always working with the most current data and details.
• The disadvantages of flexible budgeting include its time-consuming nature, lack of accuracy, and delays in processing.
• That would likely involve promises of more spending cuts in subsequent legislation, Tillis said.
• Now let’s illustrate the flexible budget by using different levels of volume.

Flexible budgets are especially helpful in environments where costs are closely aligned with the different level of business activity. SaaS businesses typically work with costs like hosting fees and site development, so when website traffic starts to increase, so do those hosting costs. The fixed costs are constant and remain same in both static and flexed budgets. The next step is to subtract flexible budget amounts from actual figures to obtain the required variances. Fixed costs remain constant regardless of your business activity levels. These costs do not fluctuate with changes in production or sales volume.

Mastering Your Business Finances: Understanding the Operating Budget

Flexible budgeting can also tie into anything related to headcount (like employee benefits and salaries). If you were to forecast the cost of benefits, you’d link the budget line item to your headcount planning forecast so that as headcount increases, the cost of benefits also increases according to the per-employee assumption. It’s most common to update forecasted line items in a flexible budget following a monthly review of total costs and top-line growth. The types decide the flexible budget format applicable in different scenarios.

Flexible budgets make sense

If your business environment is stable with predictable costs and revenues, a static budget might suffice. However, if you operate in a dynamic market, the benefits of real-time adjustments and accurate performance evaluations may outweigh the costs. Evaluate your specific needs and capabilities to determine if a flexible budget aligns with your financial goals and operational structure. For more insights, explore how to build a better budget tailored to your organization’s needs. Next, determine the activity levels that will drive your budget adjustments. Establish a range of activity levels, such as low, medium, and high, to cover various scenarios.

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• Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
• A flexible budget is much more realistic than fixed budget since it gives emphasis on cost behavior at different levels of activity.
• The second column lists the variable costs as a percentage or unit rate and the total fixed costs.
• For this reason, businesses and non-profit organizations that function in somewhat volatile circumstances are very likely to employ this approach to budgeting.

Both sets of instructions would be in the final budget resolution, and then the two chambers could hammer out differences later on what the actual reconciliation details look like. Klarna balance account required and funds can only be used within Klarna. Cashback issuance depends on store approval and may be affected by cookie settings, combining offers, product exclusions, or other factors beyond our control.

After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. In the case of a typical business, if it is newly started, it becomes tough to predict the demand for the products/services accurately. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Even households can benefit from using this type of approach to budgeting. A flexible budget for the home would allow for sudden events like the loss of a job, the need to replace a major appliance, or an extended illness of one of the major financial contributors to the upkeep of the household. Because the alternative strategies can be implemented immediately, the negative impact of unforeseen events can be minimized, allowing the household to continue functioning in a somewhat normal manner. They prepare a flexible budget to account for different sales volumes during the year. During a peak season, they sell 5,000 units, and during off-season, they sell 2,000 units.

This is the simplest form of a flexible budget, and it only alters those expenses that vary directly with revenue. In the example above, we showed that the restaurant does a simple adjustment based on the increase in customers, which directly affects revenue. Flexible budgeting puts more pressure on you to have rock-solid financial assumptions as you tie various line items together in the model. And the reality is that the effort you put into tying certain line items together may not be worth the time. Not every line item or set of line items has a strong enough correlation to others for flexible budgeting to work.

Ideally, the amount allotted for each budgetary item will be sufficient to cover all related expenses, and the income levels will be sufficient to allow the budget to stand as is. This includes revenue, expenses, and the key activity metrics you defined earlier. Accurate data collection is vital for making real-time adjustments to your budget.

Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases. A static budget is typically based on a fixed level of activity or output and does not change with changes in sales volume, production volume, or other measures of business activity. It is often created at the beginning of the budget period and is not adjusted as the period progresses. When a flexible budget is adjusted to actual activity level, we call it a flexed budget. It is the budget which would have been prepared at the beginning of the period, had the management known the exact actual output. Any comparison between actual results and a flexed budget is more meaningful than a comparison with static budget especially if the actual activity level deviates significantly from the budgeted activity level.

This ensures that your business operates at optimal efficiency, even in the face of changing circumstances. For instance, if a particular department is underperforming, you can reallocate funds to support areas with higher returns. Mosaic eliminates silos by connecting to your ERP, CRM, HR system, and billing systems to centralize financial data from across departments. You can access automated customer, account, and department mapping to ensure your variance reports can get to the most granular level with just a few clicks. Flexible budgets come with advantages like their usability in variable cost environments, their detailed picture of performance, and their overall efficiency for budgeting teams.

Mosaic automatically aggregates and consolidates all your financial data in real time, giving you a better starting point for the budget vs. actuals process so you can dig into the causes of budget variances more effectively. Better yet, when you have real-time budget visibility, you can forecast or update your budget (as needed) and see those updates reflected on other key metrics that matter to your business. With Mosaic, you can also import your financial statements from Excel, ensuring seamless integration and facilitating a more holistic view of your financial position. Sales has a budget, marketing has a budget, product has a budget, and so on. Those siloes make flexible budgeting nearly impossible and limit the strategic value of an over-stretched finance team. But with Mosaic’s business budgeting software, you can streamline processes and break down silos to act as a more collaborative partner to everyone in the business.

Since the actual activity level is not available before the accounting periods closes, flexed budgets can only be prepared at the end of the period. A flexible budget is an operating budget that features alternative estimates for various line items. The idea behind the alternatives is that by planning for potential changes in production costs or sales volume, the business can respond quickly and keep the company profitable.