What is a flexible budget?
Flexible budget is an operating budget that contains alternative estimates for different line items. The idea of alternatives is that by planning potential changes in production costs or sales volume, the company can respond quickly and keep the company profitable. This particular approach to budgeting, sometimes referred to as a variable or dynamic budget, can also use this specific approach to budgeting.
Like all budgets, a flexible budget includes the establishment of line items that deal with each type of cost incurred in a given financial period. Each line item is assigned a limit or value, with the total amount of the budget coming to something less than the expected income for the same period. Ideally, the amount assigned to each budget item will be sufficient to cover all related expenses and the level of income will be sufficient to allow the budget to stand as it is.
Flexible budget model is a bit differentDue to the built -in emergency access, which allows you to quickly change line items in case of unforeseen complications. For example, if the consignments of raw materials are delayed and adversely affect the rate of one or more products, it is possible to adjust the different line items that will be affected by this slowdown of the product and maintain the budget balanced. If the sales volume suddenly decreases, which affected the amount of income generated, the flexible format facilitates a rapid change in the amounts associated with specific line items that reflect a new set of circumstances.
The ability to quickly adjust a flexible budget that takes into account changes at the output or shift level in income means that the enterprise or other entity can quickly move to meet new circumstances. On the other hand, a strict budget, which is based on a single set of projection and enable no space for adjustments without the complicated approval process, loses precious time and money that could be used efficiently. FROMThis reason is businesses and non -profit organizations that operate in somewhat volatile circumstances, most likely this approach to budgeting.
Even households can benefit from using this type of access to budgeting. A flexible home budget would allow sudden events such as loss of employment, need to replace the main appliance or an extended illness of one of the main financial contributors to household maintenance. Because alternative strategies can be implemented immediately, the negative impact of unforeseen events can be minimized, allowing households to continue to function in a somewhat normal way.