What are the advantages of flexible budgeting?


Quick Answer

According to AZCentral.com, flexible budgets are advantageous because they reduce the chances of encountering unforeseen problems and take advantage of unexpected opportunities. Flexible budgets also help avoid overspending, which can decrease labor costs for businesses.

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What are the advantages of flexible budgeting?
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Full Answer

Unlike static budgets, flexible budgets are not based on historical market conditions, sales and vendor costs. Instead, they are adjusted based on changes in business operations and production outputs. The main benefit of using such a budgeting system is that it allows businesses to increase spending to take advantage of opportunities presented by better-than-expected revenues, according to AZCentral.com.

Flexible budgets change as new data becomes available. Businesses can make appropriate adjustments to spending levels whenever there are changes in the external environment. According to Accounting Tools, flexible budgets are especially useful in businesses in which costs are closely aligned with the level of business activity. For instance, in a retail environment, the cost of merchandise is linked to revenues and the overhead is a fixed cost.

Flexible budgets also give managers the ability to assess the performance of the company and predict the financial results at different activity levels. A flexible budget also enables a manager to control cost, because it shows where the actual performance deviated from the planned performance, according to the Houston Chronicle.

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