What is a flexible budget?

A flexible budget is designed to adapt to changes in the volume of activity or production levels. It allows for adjustments in budgeted figures based on the actual level of output or other relevant metrics, such as sales volume. This adaptability is crucial because it provides a more accurate reflection of expected revenues and expenses under varying conditions, allowing managers to assess performance relative to actual operational levels rather than theoretical or fixed amounts.

This approach contrasts sharply with fixed budgets, which remain static regardless of actual operations. Fixed budgets can lead to misleading variances when business activity fluctuates. In terms of usage, flexible budgets are not restricted to capital expenditures; they are applicable across various budget categories, including operational budgets. Additionally, while considering cash inflows and outflows is important for budgeting, a flexible budget also encompasses other aspects of financial performance, making it broader than just cash flow considerations. Thus, the ability of a flexible budget to respond to real-time changes provides valuable insights for decision-making.