Trying to get your head around budgeting can be stressful and time consuming, especially if your performance is linked to evaluating your sales performance! There are many types of budgets that can be used the most common being; Static Budget and Flexible budget also known as a flex budget.
There are also:
- Fixed budgets
- Rolling budgets
- Continuous Budges
A static budget is the option of choice when you have a reasonably predictable known sales and expenses over a fixed period and that they are not expected to change much through that period.
A flexible budget on the other hand is an option for when the expectation is more fluid, where the situation could change substantially making comparisons of results to the static budget would not be relevant. When a flexible budget is in operation a number of formulas are used, these look at actual real time revenues for expenses and other activities and adjust the budget accordingly; rather than using fixed numbers for the expenses it uses percentages of revenue. This allows for an unlimited number of changes in the budgeted expenses that is linked into the actual revenue that is earned. However one of the disadvantages of a flexible budget is that it does not always take into account the changes that occur due to revenue variations, unless a more complicated format is used to take account of step costs. This is where costs do not alter on a regular basis but rather at fixed points in the budgets calendar. When deciding on your budgeting approach be it one or the other or a combination it is a good idea to weigh the advantages and disadvantages of a flexible budget, some of these bear considerations:
- Can you accounting team manage the intricacies of the flexible budget? Do they have the time, resources and experience?
- Flexible budget actually needs some sales figures to be put into to operation so not always the appropriate choice at start up of a business.
- A flexible budget can create an additional level of stress on sales performance as time scales are vastly reduced.
- A flexible budget tends to be only used with relatively limited revenue.
- Many costs are not variable and as such have difficulty fitting into this budget style.
- Depending on your accounting team resources, time and experience, step costs are limited due to the management and administration of a large number of these.
- Time delays between step costs and revenue received may occur.
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