Why flex a budget

By moving your money around you can see exactly how the numbers will work out, and can make sure to keep quality of life priorities from disappearing entirely.

The biggest disadvantage to a flexible budget is that it does let you think of your finances as flexible. While this is more realistic, many of us benefit from rigidity when it comes to daily, healthy routines. These simple routines can just work. Introducing flexibility can create confusion and break you from healthy patterns. A flexible budget can be enormously valuable. Just make sure that you are actually using it to build good financial responsiveness, not using it to break good financial habits.

Let's start with an example of flexible budget in practice. We'll keep it broad. There's no need to get too deep in the weeds. To avoid complication we will use post-tax numbers.

Now let's say that in January we got into a fender bender. Since this is a flexible budget, we can adapt and might adjust as follows:. Note that, while we spent the mechanic money in January, we adjust our budget for it in February.

This month we won't hit our savings goal but by flexing the budget we did manage to keep the car accident from putting us into the red. Learn how to create tax-efficient income, avoid mistakes, reduce risk and more. With our courses, you will have the tools and knowledge needed to achieve your financial goals. Learn more about TheStreet Courses on investing and personal finance here. Receive full access to our market insights, commentary, newsletters, breaking news alerts, and more. I agree to TheMaven's Terms and Policy.

What Is a Flexible Budget? There are two ways to look at a flexible budget. Corporate Finance In business, a flexible budget is one that you adjust based on changing costs and revenue. Personal Finance The rest of this article will focus on the personal finance of flexible budgeting because… well, that's a lot more relevant to the rest of us.

How to Create a Flexible Budget Arguably. Start by Creating Categories Everyone has a different approach. One good way to start is by simplifying. TheStreet Recommends. By Scott Rutt. By TheStreet Staff. By Vidhi Choudhary. See More. The following are a few downsides that may result from a flexible budget:.

Because a flexible budget adjusts regularly to reflect a company's current revenue, this type of budget cannot be used to compare actual expenses or revenue to expected expenses or revenue. This can make it difficult to determine if a company's revenue is above or below what was expected.

A flexible budget can be difficult to formulate. This is because not all costs a company may incur are variable and must be input into the budget as a fixed cost. Calculating each category and determining the type of cost it requires can be difficult and take time.

A flexible budget may not benefit certain companies, especially companies that have a majority of fixed overhead costs. For example, a company that has little to no cost of goods sold and has a set overhead cost each month will likely not benefit from a flexible budget plan. The following are steps you can take to create a flexible budget for your business:. Fixed costs typically include expenses such as rent and monthly marketing costs.

Once you have determined which costs are fixed and which are variable, separate them on your budget sheet. Divide the budget you plan on spending on variable costs by your estimated production. This will provide a starting budget for cost per unit. Create your budget with set fixed costs that will not change and variable costs depicted as percentages that can be adjusted based on actual revenue.

This will adjust the variable costs based on accurate data from the accounting period. Input the final flexible budget from an accounting period into your accounting software to compare it to the expenses you initially anticipated. The following is an example of how flexible budgeting may be used by a business. Find jobs. Company reviews. Find salaries. Upload your resume. Sign in. Career Development. What is a flexible budget? Types of flexible budgets.

As it was cheaper, this is a favourable variance. Calculation: First we need to establish what the budgeted variable element per unit is. Analysis of variance: This adverse variance would need a detailed analysis because there are a number of scenarios which could lead to this variance. Some suggested causes would be:. Our actual output of 2, units will require a third piece of equipment.

We can see that this is the same as the actual cost, resulting in variance of zero. This highlights the importance of why we, the accounting technician, need to be able to flex a budget. By flexing the budget we can see that actually costs operated exactly as our budget suggested. Sometimes variances will affect one another. This interdependence of variances will aid any analysis which is to take place.