The Advantages of a Flexible Budget
A budget can be a document that sets strict spending limits for your small business or a template that changes and grows with your company as you get a better handle on your income and expenses. Advantages of a flexible budget include the ability to cut or increase spending, depending on marketplace and business conditions. This allows you to avoid unforeseen problems and take advantage of unexpected opportunities.
By their strictest definitions, a static budget is one that presets your expenses based on projections, and a flexible budget continually recalculates your expenses based on revenue. Some small business owners consider a flexible budget one that has built-in expense flexibility in areas that they can quickly change based on conditions other than revenues.
With a static budget, you set spending levels based on suppositions regarding historic market conditions, sales, vendor costs and other factors. As conditions change, your budget continues to follow spending levels, production outputs, staffing guidelines or other factors that might be too high, based on changes that occur during the year.
For example, if you budgeted $10,000 per month for labor at the beginning of the year, based on sales of $100,000 per month, and your sales average $80,000 per month, features of a flexible budget would trigger a decrease in labor costs if you set the budgeted amount as a percentage of revenue.
One of the main advantages of a flexible budget is that they let you tie spending to sales, allowing you to increase spending to take advantage of opportunities presented by better-than-expected revenues. For example, if your sales increase dramatically, a flexible budget that sets your marketing spending as a percentage of sales lets you increase your advertising or promotions to further increase sales.
It is important to understand your manufacturing and overhead costs if you wish to know your true costs of sales. A flexible budget recalculates your production and overhead costs based on sales data or units sold. You can review these numbers each month to determine which of your products are providing the best profit margins, helping you determine whether it is cost effective to keep producing them.
A static budget relies on data that is current only at the time the budget is created. During the course of the year, legislative changes can affect your taxes or expenses. Weather conditions can change your materials costs or shipping expenses. Sales might come in much higher or lower than the previous years' figures, which were used to make your initial budget projections. A flexible budget changes as new data becomes available, allowing you to change spending levels.