A flexible budget isn't better than a static budget -- they simply serve different purposes. Companies create a static budget at the beginning of an accounting period, outlining how much they predict they'll spend and receive. The static budget provides a realistic goal for the accounting period. The company creates the flexible budget after the accounting period ends, illustrating how much it actually spent and earned.
Comparing the flexible budget against the static budget allows you to analyze your company's performance over the term. If the company made more sales than expected, look at whether it also spent more than expected. The extra expenditures might prove worthwhile, if they don't exceed the profits, or if they were an investment. For instance, if you had to spend money unexpectedly on new equipment, the monthly budget might show a deficit. However, if the new machine made production became more efficient, leading to increased sales, you can estimate how long the machine will take to pay itself off. Comparing the two budgets lets you make these calculations.
Through this analysis, you can better manage your finances. Comparing flexible and static budgets over a longer period of time, such as six months, will give you a better idea of what needs to change. If you find the company continually makes unexpected purchases, for example, you must evaluate the need for these purchases. The company might have purchased inferior rather than quality equipment, for example, and your budget comparisons may show this choice didn't pay off.
Adapting the Static Budget
If you strongly resist any changes to the static budget during the accounting period, you might need to think more flexibly. Remember that the static budget itself is generally flexible in nature, because change always plays a factor in business operations. Don't feel like you've fallen short by adapting the budget. That's a natural part of business, and during the next month, the company could outperform your expectations. You'll get a clearer perspective of your company's performance by evaluating it over the long-term, instead of obsessing about the weekly or monthly budget changes.
Create flexible budgets at the beginning of an accounting period to predict what your company will earn if particular changes occur. For example, if you wish to start a new marketing campaign during that period, use the flexible budgets to show what you'll earn if you sell 500, 1,000 and 10,000 more products. Then you'll have a better idea of how strong an investment the advertising campaign would be, and how much to invest. To create the budgets, you must make educated guesses about how much you'll need to spend in each scenario on supplies like packaging, employee wages and other factors like shipping costs. With a flexible budget, you'll prepare the company to adapt to changes more easily.
- Investopedia; How Budgeting Works for Companies; Jonas Elmerraji; January 2007
- "Budgeting Basics and Beyond"; Jae K. Shim and Joel G. Siegel; 2008
- Thinkstock/Stockbyte/Getty Images