11 June 2024
Mastering flexible budgeting: your guide to more effective financial planning
Budgets don’t have to be massive static documents that are incapable of being adjusting to suit changing situations. There’s a new approach to consider, and it’s called flexible budgeting.
What is flexible budgeting?
The general idea of flexible budgeting is simple: they’re budgets that can be adjusted throughout the financial year. Traditionally, a budget gets set at the start of the year and remains largely fixed in place. This is called a static budget. While a static budget can feel more secure, with clear numbers, this can cause some issue when unexpected challenges hit.
For example, if your company relies heavily on seasonal demand, the budget you set at the start of the year may not accurately reflect this. Likewise, sometimes the worst can happen, and revenue drops or expenses spike. When this happens, flexible budgets give you the space to adjust.
Note that flexible budgets don’t make static budgets obsolete. For example, if your company tends to have pretty fixed, predicable costs (such as rent), a static budget is all you need. We’ll take a look at some of the challenges of flexible budgets later.
Advantages of flexible budgeting
Flexible budgets are particularly useful for small startups and SMEs, because they tend to be the most vulnerable to sudden shifts in the market.
Even if you’re a larger, more established business, there are a number of flexible budget benefits. They’re ideal for volatile markets, where unpredictable results are the norm. They’re also a great choice for a company with very variable costs that can vary from quarter to quarter (such as in the hospitality industry).
One key benefit to flexible budgeting is that it accounts for unforeseen expenses. While you can’t bring every unforeseen cost out (by definition they’re hard to predict!) you can create a plan that accounts for the risk of unforeseen costs and gives you multiple directions to pivot to if needed.
Likewise, a flexible budget tends to be a more accurate reflection of the financial state of a company. Most people in charge of a budget will be taking a look at their finances regularly, so a flexible budget is a closer reflection of how they see the numbers.
Challenges of flexible budgeting
The biggest challenge with flexible budgeting is resourcing. A one and done set budget can be put to one side and doesn’t require any more thought beyond checking things against it.
Flexible budgets also require a lot more thought, and a fair amount of vision compared to a static budget. If your finance team is already stretched, flexible budgeting can add even more to their workload without proper support.
There’s also the simple fact that you can have too much of a good thing. Flexibility is useful, but it can make it hard to formulate concrete plans around. This can also lead to issues for your accounting team, especially when it comes to closing the books.
Finally, without discipline, flexible budgets can lead to less accountability. If the budget changes too frequently, stakeholders in the business won’t take it seriously. Setting expectations is important!
Implementing a flexible budget
Once you’ve settled on flexible budgeting, there’s a few steps you can take to implement them.
Firstly, as with any budget, you need to take the time to set out your fixed costs (things like leases, debt repayments and utilities or insurance) which tend to be fairly set in stone for the year. You will also have a lot of variable costs too (these tend to include things like distribution expenses, salaries and raw material costs). Set them out.
You can then use the variable costs ratio to set out those variable costs in relation to your fixed costs. From there you can create a budget model, model different scenarios, and compare your budget with a budget variance analysis.
Static budgeting teaches us to focus on doing a lot of work all at once. Flexible budgeting works better if you avoid overcomplicating things. Don’t procrastinate, and don’t expect to create the perfect budget. Flexible budgeting is all about acknowledging where we have knowledge gaps and accounting for them.
Flexibility with MHR Global's finance function
Finance from MHR provides you with the tools you need to create a huge variety of budgets, and to make those budgets as effective as possible.
All of this can integrate into our HR l offerings, enabling real-time data to feed into your budgets and make them as accurate to the moment as possible. From here, you remove a lot of the roadblocks that can come with flexible budgeting, speeding up your closing and increasing the accuracy of transactions. Monitor performance in real-time and become the singular source of truth for your finance function.
