Flexible Budget: A More Convenient Approach to Organizing Your Finances

 

A fundamental part of a business is having a budget and how to make it work effectively and efficiently. Formulating a budget whether it is for personal consumption or for a small business and even for a huge enterprise should be done prior to the start of a period and should always be planned carefully, taking into consideration previous records if there is one. A business budget for instance can be used as a gauge whether the expenditures are going as planned, which in turn can readily show where the entire business is heading. For most businesses, having a flexible budget is preferred so as not to be completely dependent and stuck with what has already been prepared.

Budget Preparation

Budget for businesses of any form and type is completely different from those being prepared for the household. When budgeting for the household only, what we only need to know is how much money needs to be allocated for the different expenses. But even household budgeting practices a flexible budget since it is a more convenient approach. Budgeting for a business is another thing, since we do not only think of how to allocate a certain amount of money, but there is also a need to understand the importance of spending them and how much it would affect the entire business. Preparing a master budget or commonly referred to as static budget is based on projected figures wherein during certain duration the business is expected to limit expenses within these projections.

Budget Changing

There are instances that expenses exceed the static budget and this happens when there are sudden expenditures that the business encounters. This is completely normal as part of every business operation. Although budget estimates have been prepared beforehand, it does not mean that a business will stick to it without any consideration. Budgets are merely a tool to aid in most vital decision making but businesses have flexible budgets. In this way, the entire business is not constrained in not spending on something that is critically needed for its growth and development. A flexible budget is based on the actual output of the business.

Performance Evaluation

When the period for which the budget prepared is complete or over, there is now a need to determine whether expenses have gone over or not. A flexible budget, which includes those that have been actually spent, are now compared from the static budget to get the difference, which is now called the flexible budget variance. By comparing the business’ expected expenses as against the actual occurrence of such expenses, the management will now have an idea on how it has affected the performance of the business as a whole.

Advantages of Flexible Budget

Making a flexible budget is not as complicated as it may sound to be. Understanding the advantages of flexible budget can give a lot of information to the management of a business establishment. A careful analysis of its outcome for a given period will help in making future decision making. The method of preparing a flexible budget is simple that even non-accountants can do them. It is commonly prepared at the end of a period but in some cases, flexible budgets may also be prepared prior to the start in order to help anticipate costs and revenues. Even if preparations can be sometimes a little confusing, all the efforts will all be worth it. After comparing static budget and the flexible budget, and evaluating the performance of the business, it is now easy to see whether the business should have to do good the next time around or if it has exceeded the excellent mark.