Should Budgets be Static or Flexible?
Static budgeting has the advantage of being relatively easy to develop, understand and use, but creates variances to actual results as circumstances change from those assumed when budgeting.
Flexible budgeting involves the planning of income and expense at varying levels of resource utilisation. This method has the advantage of recognising the fixed and variable aspects of costs and revenues, and provides a high level of control. It also allows the identification of rate and volume variances. It is, however, more complex to implement and more difficult to understand and maintain. It also provides a moving target for individuals and organisations as volumes and rates change.
Actual results can then be monitored and controlled against the budgets and forecasts through the use of profitability measurement and reporting. Flexible budgets make it easier to manage the impact of external factors, but harder to explain the results.
Flexible budgeting also helps cross-charging. Charges for shared services can be flexed in line with actual results to ensure usage matches cost.
Analysts expect accurate plans and forecasts, so perhaps a combination is the most appropriate answer. An annual plan which is fixed, but monthly or quarterly forecasts (depending on the level of market volatility) which enable actual results to be compared with the changing market conditions.
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See also
Review the Budgeting Process
In a rapidly changing world the tools used to plan the future and manage performance need to be flexible too.
Budgets are Dead, Long live Budgets
Many people are decrying the traditional methods of budgeting and suggesting something new. Yet what is traditional budgeting and how do these new techniques differ?
Outcome Based Budgeting
Traditional budgets measure inputs, agreeing how much resource will be allocated to each cost centre. Yet people are more interested in the outputs achieved.
Budgets as part of MI
Budgets used to be a key management tool but as the importance of non-financial information increases they become a smaller part of MI
Managing the Future
The need for focused management information based on a consistent base of cost effective, timely data is becoming one of the keys to competitive advantage.
Case Study - Responsibility Reporting
We have worked with the UK division of an International Bank to manage the design and implementation of an automated Management Responsibility Reporting System
Alternative Budgeting Methods
There are basically 4 methods of budgeting; traditional, zero-based, priority-based, and activity-based although most companies use a combination of methods
Avoiding Cross-Charging Noise
Do many of your managers spend more time arguing about the amount of costs received through the charging system than they do managing those costs?
Getting Lean and Efficient
When everyone is reviewing budgets and slashing costs, it can be a good time to get the whole organisation on a diet and make all the processes more lean and efficient.