About Flex Budgeting in Accounting
Flex budgeting is not nearly as complicated as you might think it is. It is more of a principle of business philosophy than an accounting technique. Simply stated, it's a budget that takes into account marginally unpredictable events and how it might affect spending and available capital reserves. This is particularly important to businesses that are affected by unpredictable variables such as the weather, traffic patterns or prices on volatile commodities.
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Significance
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Flexible budgeting can be used by multinational corporations or household financial planners. To perform it accurately, it helps to have historical data on how certain unpredictable events have affected budgetary costs. The technique is designed to overcome the many limitations involved in running with a static budget that does not respond to changing business conditions. With proper use of flex budget accounting, businesses can alter their plans and decisions in real time, enabling them to respond to the market with lightning rapidity.
Function
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Flex budgeting can be used to allow for either increases or decreases in business activity. To be used as efficiently as possible, there should be no built-in biases - it should allow for both increases or decreases no matter what reason those occur for. Part of the flex budgeting process is identifying which costs are fixed and which are variable. The most efficient budget planning process transforms as many fixed costs into variable ones as possible, to increase the ability of the business to change course to respond to shifting conditions.
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Types
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There are many expense categories that can be shifted to variable expenses. These include labor hours, electricity usage, heating, maintenance, transportation and much more. Many of these expenses are dependent on each other. For example, a decrease in labor hours will decrease all of those operating costs. It helps before getting into the numbers involved in flex budget accounting to draw up a visual chart of expenses and to connect them with one another in order to display the various links and dependencies between them.
Effects
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Another major challenge in flex budget accounting is to set realistic limits of how much the budget will change. This enables the planner to find a "mean point" for expenses that can be used as a more general guideline for budgetary expenditures to use for more long term planning. Determine the highs, lows and likely outcomes for each expense in order to maximize the return on investment for putting the time into this more complicated form of budgetary planning.
Benefits
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All of the additional work that goes into effective flex budgeting does end up paying off. Business that carve their expenses into stone cannot react quickly enough to change, and as such end up caving to competition. Many small business owners just starting out make elementary errors in their budget accounting - for example, not taking into account the effects of seasonal shifts onto their expenditures. These little alterations in planning can make the difference between running a profit and a loss, between landing a major investor and being left out in the cold. Read the references for more information on this crucial accounting budgetary practice.
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Resources
- Photo Credit aWee, Flickr
