However, if you can structure your budget in such a way that it still works, there is definitely value in such a budgeting strategy. A flexible budget is one that changes based on needs.
While some expenses, such as utilities, might be the same every month, other may vary. A flexible budget allows you to accommodate those fluctuations without having to stress about them. This is unlike a static budget, which requires you to have the same expenses every month. One can imagine many scenarios in which a flexible budget would be beneficial.
Those might include a month with a large, unexpected expense. Or you might take a trip that costs quite a bit. Either way, expenses fluctuate. You would simply add expenses, remove expenses, or increment expenses. To increment means to add or increase. In most cases, this will happen due to inflation if nothing else. Cost naturally rise over time regardless of lifestyle inflation.
As you can probably guess, annual budgeting involves mapping out your expenses for an entire month period. You would then essentially mold your costs to fit into that budget. There are distinct advantages and disadvantages with this budgeting method. On the one hand, budgeting an entire year means you would know exactly what your expenses will be. For an individual, 12 months is a long time to budget all at once. Over such a long period of time, unexpected expenses are almost inevitable.
And when they do happen, how will you handle it? If you have to cut spending on things that are essential, this method could create a lot of stress. Technically, activity based budgeting is a business method of budgeting. However, to a certain extent it can be applied to individual budgets as well. Thus, you would analyze all of your costs each year in order to decide create a budget.
Doing such an in-depth analysis every month, or every year, will certainly take time. Of all of the types of budgeting, this might be the most rigorous. However, it also gives you a chance to identify expenses you may have missed before.
This type of budgeting, also referred to as budget envelopes, is a simple one. You quite literally use envelopes to manage your budget. Thinking gas, groceries, entertainment, etc. Each one of these is a budget category. Every month, you determine how much you will spend on each budget category.
This can be the same every month if you want. Then, as you get paid, add cash to each envelope — if you get paid twice a month, you would add half of the amount each time you get paid. Then, when you know you are going to spend on one of those categories, you pull cash out of that envelope. If you end up using all of the cash, you can no longer spend on that category. At least not until you get paid again!
As its name suggests, this type of budgeting is specific to events. That might be a big vacation, a wedding, and so on. This is not something would need to do on a weekly or monthly basis. As a general rule, with event budgeting, you should know how much you want to spend ahead of time. Instead, you would actually make it granular. The operating budget ensures that the managers know their scope of work in proportion to the amount of funds allocated to the department.
A business is always in need of short term, medium-term and long-term funds. The financial budget ensures that the right types of funds are available whenever they are required. The aim of this budget is to manage the outflows with the inflows. The outflow is in the form of expenses and inflow is in the form of sales. Decisions like mergers and acquisitions depend on the financial budgets of the organizations. If the business has the desire to take over any company, its financial budget shall determine the value up to which the business can quote for acquiring another organization.
In simple words, the financial budget describes the financial health of the business. Cash flow budget is more about managing the cash of the business. The cash flow budget determines whether the accounts payable and accounts receivable are dealt with timely.
It ensures that the inflow of the cash is regular and timely. This budget is important as it helps the managers to determine the period of cash shortage and accordingly take necessary action towards it. It reflects possible receipts of cash from various sources and the expected requirement of cash for meeting various obligations. In this way, it highlights well in advance neither the need for taking necessary measures to streamline the cash flows so that there is neither any cash shortage nor the surplus of cash.
A cash budget is prepared for the budget period, however, for effective cash management, it is generally divided monthly, weekly or even daily. A cash flow analysis may be made based on past data or estimated data of a forthcoming period. When the cash flow analysis is done based on past data the statement of such analysis is usually called the cash flow statement. On the other hand, if the cash flow analysis is done based on estimated data about a forthcoming period, it is called the cash budget.
The differences between the cash budget and cash flow statement are discussed as:. But they are not the one and same things. The difference can be discussed as follows:. Fixed Budget is a budget which is designed to remain unchanged irrespective of the level of activity attained. This type of budget is most suited for Fixed expenses, which have no relation to the volume of output. Fixed -Budget is ineffective as a tool for cost control.
Fixed Budget is based on the assumption that the volume of output and sales can be anticipated with a fair degree of accuracy. This budget recognizes the difference in behavior between fixed and variable costs about fluctuations in output. This budget serves as a useful tool for controlling costs. It is more realistic, practical and useful than Fixed Budget. A flexible budget that can be used to estimate what costs should be for any level of activity within a specified range.
A flexible budget shows what costs should be for various levels of activity. The flexible budget amount for a specific level of activity is determined differently depending on whether a cost is variable or fixed. If a cost is variable, the flexible budget amount is computed by multiplying the cost per unit of activity by the level of activity specified for the flexible budget.
If a cost is fixed, the original total budgeted fixed cost is used as the flexible budget amount. Flexible budgets take into account how changes in activity affect costs.
A flexible budget makes it easy to estimate what costs should be for any level of activity within a specified range. When a flexible budget is used in performance evaluation, actual costs are compared to what the costs should have been for the actual level of activity during the period rather than to the budgeted costs from the original budget.
This is a very important distinction— particularly for variable costs. If adjustments for the level of activity are not made, it is very difficult to interpret discrepancies between budgeted and actual costs.
The cash budget is futuristic. It reflects expected receipts and payments of cash under different heads during the budget period. The purpose of the cash budget is to indicate whether there will be any deficiency or surplus of cash. The purpose of the cash flow statement is to indicate how the cash position of the firm. A cash budget can be prepared for a short period says, monthly, weekly, or even daily and also for a long period says, half-yearly, yearly.
The cash flow statement is prepared for a longer period usually coinciding with the past accounting year.
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