What Is Meant By The Expression Flexed Budget?


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There are several ways of building up budgets. Budget building is no hard science and rmains overall estimate. Budgeting an exercise or operation or whatever means allocating amounts of money for either your expenses or your revenues. For example if you are running a restaurants, you can count as cost: Energy /commodities (electricity, gas, water ..), wages, rent of premises, licence, purchase of materials ...Obviously, your only source of income would be what the customers would pay for their meals. Now if you run the business just following on what happened on the previous year, you would probably allocate the same prospective figures with an increment for possibly inflation or new taxes or wages increase. This method seems very straight forward, the problem being that it is a bit too far from reality.

Not pretending their that flexed budgeting is a 'real' budgeting tool but the model is more likely to fit any deviation (called variance) from the expected scenario.

If you again take the restaurant example and decided to drill down your costs. You could define an average cost of electricity, water, ngrdient, wages per menu served. This is a very reductionist view of the situation but I am sure you will figure a better example yourself.

Now if my number of customers is not up to expectations (let's say there are road works on the street or we are currently hit by a brutal and unexpected financial crisis). It is likely that the operation costs will rise and that the revenue decrease. This is why flex budgeting attaches variation to each budgetary post.

In the second scenario, we could be facing both the desertion of customers (which means a reduction of revenue) and the increase of raw products (inflation). In this case you could revise or anticipate on the future business and revise your budget according to your cost variance.

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