“Flexible budget variance” isn’t exactly the catchiest phrase in the finance lexicon. But it slips easily off of the tongues of budgeting pros as it’s an essential tool for modern FP&A teams.
Flexible budgeting helps you stay current with the challenges and opportunities that surface throughout the year. By updating budgets to reflect those changes, you can course correct to improve efficiency or enhance performance.
And while flexible budgeting variance requires more time than simply establishing the once-a-year static budget, new software solutions with intuitive dashboard capabilities offer significant time savings while serving as a powerful tool in calculating, analyzing, and then clearly communicating budget variances and their implications.
Flexible budget variances are the differences between line items on actual financial statements and those that are on flexible budgets. Since the actual activity level is not available before the accounting period closes, flexible budgets can only be prepared at the end of the period. At that point, flexible budget variances can be useful in identifying any shortcomings or deviations in actual performance during a given period.
Flexible budget variance is also beneficial during the planning stage at the beginning of the accounting period. By adjusting project budgets to a series of possible activity levels, finance creates data that helps anticipate the effect of changes in activity levels on revenues and costs. This helps you make more informed decisions if adjustments are needed.
Taking a flexible approach to budgeting typically doesn’t mean you get a free pass when it comes to more traditional, static budgeting. In fact, the static budget is essential for establishing a baseline to measure performance and results and ultimately for calculating the variances that do occur throughout the year.
It’s important to keep in mind that not all line items in a budget can be flexible. For example, your company has many expenses that are likely fixed for the entire year, such as rent or contractual obligations.
Yet other expenses have considerable chance of varying to one degree or another. For instance, staffing projections may be dependent on an expected long-term contract being finalized—or unexpected market conditions may result in a welcome spike in sales.
In these instances, with a traditional, static budget, your company would likely not have the ability to make budget adjustments to manage significant changes. While your organization would respond as needed to these changes, at year-end there would be large budget variances that would lack analytical value for better planning for the year ahead.
Meanwhile, flexible budget variance analysis offers the ability to derive meaningful insights throughout the year, allowing for improved planning and budgeting for the future. The power and potential of flexible budgets are further fueled by technology platforms such as those offered by Workday Adaptive Planning that provide drill-down capabilities that can quickly identify and analyze variances. Users have the capability to create a variance report that highlights the changes in dashboards, offering a range of options for putting the numbers into highly accessible context. .
Relying on more timely and relevant budget numbers, you can use flexible budgets to provide senior executives and line of business managers with dynamic guidance on spending, investments, or where cost controls might be necessary based on the business’ changing situation. Think of it as a way to take a fresh look at your business budgeting and planning processes.