Even if a cost is assigned a numerical value, a monthly review of costs compared to revenue allows that number to be changed for future periods. We’ve previously covered the five different types of budget models that businesses can choose from. The flexible budget offers the most customizable experience, allowing it to be easily adopted by many different businesses.
Master budgets are important because they serve as a planning tool to guide the company’s actions in the upcoming time period. They also help the firm direct the allocation of its resources to achieve its goals. Master budgets provide an overview of the performance of different departments within the company and can help pinpoint areas for improvement or streamlining. The company must determine the number of sales the company expects to make in the next year.
Budgeted Balance Sheet
In order to accurately predict the changes in costs, management has to identify the fixed costs and the variable costs. Fixed costs will be constant within relevant range of operations where the variable costs will continue to increase as production increases. Whether a flexible budget or static budget is used by a business is largely determined by the nature of the business cycle and how seasonal it may be. The sophistication of the accounting department to handle the more complex task of managing a dynamic budget is also important in determining whether any frequent and unexpected changes can be properly addressed. In publicly-traded companies, often a combination of both approaches is used. In theory, a flexible budget is not difficult to develop since the variable costs change with production and the fixed costs remain the same.
For SaaS companies, flexible budgeting relates more to the cost of revenue — the actual costs for creating and delivering a product/service to customers. The cost of revenue involves hosting fees, service and cloud fees, and website development. Flexible budgeting is a flexible budget meaning dynamic budgeting model that allows you to adjust to changes in costs and revenue in real time. What’s more important is to apply the principles to certain parts of your budget. Your flexible budget would then look at revenue, based on both units sold and sales price.