Flex Budget Analysis Flexible Budgeting:

Flex Budget Analysis

Flexible budgeting: Risk management and ethical considerations

Flexible budgeting is more of an accounting philosophy than a specific accounting technique. Simply stated, flexible, as opposed to static budgeting, takes into account "marginally unpredictable events" and anticipates how the weather, commodity prices, seasonal demand, and other factors such as available capital will affect a particular business' bottom line (Hewitt 2010). A flexible budget thus "adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity" (Flexible budgeting, 2001, Accounting coach). While it can be more time-consuming to compute than a static budget, a flexible budget can allow the organization to protect itself against unanticipated losses and better use unexpected opportunities to generate even more revenue in the future.

Minimizing risks associated with sales forecasts

Because flex budgeting is computed in 'real time' it can more easily be used to allow for either increases or decreases in business activity than traditional forecasting statically based upon past years' performance data. "To be used as efficiently as possible, there should be no built-in biases -- it should allow for both increases or decreases…Part of the flex budgeting process is identifying which costs are fixed and which are variable. The most efficient budget planning process transforms as many fixed costs into variable ones as possible, to increase the ability of the business to change course to respond to shifting conditions" (Hewitt 2010). Variable costs include the number of hours workers labor and subsequent labor costs, overhead and building maintenance and fuel costs for transportation.

While nothing is certain in any business environment, certain industries are more responsive to external events, such as consumer sales-driven organizations. For example, the harsh and snowy winter in the Northeast this year had a negative impact on retail establishments, particularly entertainment-related businesses such as movie theaters and malls, as people were often unable to 'shovel out' of their homes. However, the effects of the winter improved sales figures for home improvement companies that sell shovels, rock salt, and snow-blowers. A retail company must anticipate sales orders and profits based on data from past years, but the organization may be faced with a warm winter after stocking the shelves with mittens or be faced with unexpectedly high sales figures if it unexpectedly manufactures the 'hot toy' of the upcoming Christmas season. Flexible budgeting takes into consideration such circumstances.

Ethics