Next, separate your spending categories by the things you can change and the things you can't. Your first section is your necessary expenses. These are fixed bills with little room for change electricity, heating and internet for example.
This also will generally include housing costs, not much month-to-month negotiating on your rent, as well as medical expenses and loan payments. Ideally you would like this section to account for less than half of your take home pay.
Your second section will include your expenses with room to move. This will generally include categories like the Daily Expenses for groceries and coffee, your transportation budget and shopping. These are the expenses that you can't cut out altogether but which you can adjust if need be. Your third section is your unnecessary expenses. Entertainment will usually dominate this category. If you need to find money, you can take it out of the bar tab with no real impact on your life.
Finally, your fourth section is savings. This is the money that you'd like to set aside both for general savings and for any big-picture priorities. If you're saving up for a vacation , setting aside extra money for retirement or have dedicated an extra section of the budget to paying off debt, it will go here.
A flexible budget is about more than just making sure you don't go into the red in any given month. It's about making sure you adjust your spending based on what's important to you. For example, perhaps you want to dedicate a specific amount to savings each month or are focused on ramping up your IRA.
These will be the priorities that you fix your budget around. Knowing your priorities will allow you to, essentially, solve for "X" in any given month. It will help you organize your spending based on what you want to achieve. What you're looking to do is account for any unanticipated expenses that came up in the previous month, and to do so in a way that preserves your financial priorities.
Your phone got broken and you needed to go buy a new one. A flexible budget is about responding to new expenses and new income over time, so that in the long run your spending remains relatively consistent where it counts. The biggest advantage to a flexible budget is that it more accurately reflects the state of your finances.
The alternative, static budgeting, can't account for unexpected expenses or changing income. You should be creating flexible budgets, not static ones. Flexible budgets have distinct advantages over static budgets.
After you get used to flexible budgets, they will become one of your favorite management tools. First, what is a static budget? It's a budget that is prepared at the beginning of the year and not changed until it's time to make a new one at the start of the next year. A static budget is just that — static. The numbers do not change for the entire year, regardless of anything that happens in the business environment.
A flexible budget, on the other hand, is a series of budgets prepared for various levels of activities, revenues and expenses. The level of activity depends upon the availability of such a factor of production. Where the business units keep on introducing new products or make changes in the design of its products frequently. The main importance of flexible budget is that it reflects the expenditure appropriate to various levels of output.
The expenditure established through a flexible budget is suitable for comparison of the actual expenditure incurred with the budgeted level applicable for that particular level of activity attained. Flexible budget provides a logical comparison of budgeted allowances with the actual cost i. Flexible budget reckons operational realities and streamlines control function and profit planning.
It gives balanced perspective on comparison. When flexible budget is prepared, actual cost at actual activity is compared with budgeted cost at actual activity i.
Flexible budget recognises concept of variability and provides logical comparison of expenditure with actual expenditure as a means of control. A flexible budget is very useful for purposes of budgetary control because it corresponds with changes in the level of activity. It is helpful in assessing the performance of departmental heads because their performance can be judged in relation to the level of activity attained by the organisation.
Cost ascertainment at different levels of activity is possible because a flexible budget is prepared for various levels of activity. According to this method, a flexible budget is prepared for different levels of activity showing different activity or capacity levels in horizontal columns and budgeted figures against different activity or capacity levels in the vertical columns.
The expenses are usually recorded under three groups, namely, variable, semi-variable and fixed. Budgeted figures for any level of activity not specifically covered in the flexible budget can be obtained by interpolation.
Under this method, an estimate of expenses is made for different levels of activity by classifying the expenses into three categories, namely, variable, semi-variable, and fixed.
The estimated expenses are plotted on a graph paper on Y-axis and level of activity is plotted on X-axis. This helps in a transparent and accurate calculation of variances. Let us consider the following information regarding the costs that are expected to be incurred by a company in the upcoming accounting period. The number of units that can be prepared at this production capacity is units. A flexible budget is an important tool for management.
It helps in setting the expected costs, revenues, and profitability of the business. Further, since the flexible budget is not rigid, it can be adjusted according to the actual activity level at the end of the accounting period and used for variance analysis.
The management can determine the performance of various departments based on variances determined. It helps in fixing accountability towards the company.
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