Uses of a Flexible Budget

A flexible budget is one that allows for variations in circumstances and customer demand. A flexible budget is useful in virtually any circumstance that business costs and expenses can change because of seasonal variations and a changing business climate. The most successful companies incorporate flexibility into their business models because so many aspects of operating a business are variable and uncertain. A flexible budget is a financial tool that accounts for these changes.

  1. Static Budgeting

    • A static budget is one that allocates the same amount of money each month, even for business processes that are prone to variation. For example, a static budget might provide a given amount for marketing but offer no provisions to change that amount even if a marketing campaign is phenomenally successful and sales soar through the roof. Static budgets are useful in circumstances where a company has no back-up sources of financing, but they can be restrictive for companies in a position to grow.

    Flexible Budgeting

    • A flexible budget enables a company to change its strategy and upgrade or downgrade its preparations to adjust to shifting demand. Most companies use flexible budgets by allocating less money to business processes when their offerings are less in demand. Laying off employees and cutting back employee hours are flexible budgeting processes because they adjust payroll obligations relative to the need for staffing. Reducing supplier orders because previously purchased product is still on the shelf is another flexible budgeting process.

    Seasonal Business

    • Seasonal business rhythms are an important reason for the usefulness of flexible budgeting. Businesses that rely on tourism experience seasons when they are busy and periods when they are slow. Companies that provision athletes for seasonal sports, such as skiing similarly experience dramatic fluctuations in customer demand with the seasons. Retail operations that gear up for Christmas similarly use flexible budgeting to stock up on inventory late in the year, and cut back during slower seasons.

    Flexible Budgeting Strategies

    • Using a flexible budget to plan your company's finances in a shifting business climate can enable you to develop strategies for weathering slow seasons and expand into new areas to compensate for shortfalls. A flexible budget can provide you with the opportunity to trim down company operations during lean times, but it also highlights suitable times for making changes, such as introducing new products that complement the sales cycles of existing ones. A flexible budget can also help you to pinpoint times when your company may need additional financing.

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References

  • Photo Credit Cutting budget deficit image by chasingmoments from Fotolia.com

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