One of the most sensitive issues related to management is, without a doubt, money. In this sense, the application of budget is an essential task for the planning and control of the company’s activities, aiming at better decision-making.
Before delving into the topic, it is important to understand that budgeting means calculating the cost of a particular product or service in order to estimate the best price. This tool can be useful on many occasions, making a difference for many entrepreneurs and managers.
However, there are different types of business budget used in the market. Among them is the dynamic budget – which can be adjusted according to potential needs. To learn about its concept and how to prepare and apply this type of financial assessment in your business, read on!
The dynamic budget – also known as flexible budget – analyzes variable costs more freely. That is, budget resources are not fixed based on a predetermined estimate and can be adjusted if the amount of actual activity changes compared to the estimate.
Therefore, when doing the dynamic budget, there is greater flexibility to move the structures according to the organization’s needs and goals.
However, it is important to keep in mind that, in order to prepare this budget efficiently, managers should have a clear distinction between expenses and costs. In this case, costs will be “flexible”, while expenses are static.
The static budget is one of the budget models most used by Brazilian companies. In it, all budget items, such as revenues, costs, expenses and investments, are determined by setting a production or sales volume that establishes the amount of other activities of the organization.
Since this volume is fixed, no changes are allowed, even if, during the execution of activities, there is some variation in demand, productivity, or results.
On the other hand, the dynamic budget allows the modification of resources made available based on the variation in results. In other words, if the production volume increases, a proportional increase in budgets such as raw materials, taxes, commissions etc., is allowed.
Before learning about the pros and cons of flexible budget, it is important to keep in mind that each company and each case may require a different budgeting model. Read on!
When creating a dynamic budget, it is necessary to have a master cost estimate already prepared and to understand the behavior of expenses – which means making a perfect distinction between fixed, variable, and semi-variable costs.
It is also necessary to identify the actual volume of items produced and sold and estimate the planned revenue in order to determine how much cash will be on hand.
Then, this financial assessment has to be compared with previous records of expenses, costs, and revenues to determine the relevance of the dynamic budget. In addition, it is important to re-evaluate it periodically.
HERE IS A PRACTICAL EXAMPLE
The WYZ Company wants to prepare a dynamic budget to make monthly comparisons between the actual and the budgeted volume. The organization is projecting the following costs:
| Variable Costs $ | Fixed Costs/Month $ | ||
| Indirect materials | 1,10 | Depreciation | 12,000 |
| Indirect labor | 1,50 | Supervision | 8,000 |
| Commissions | 0,80 | Maintenance | 40,000 |
It wants to project its costs for various activity levels, reaching the initial volumes of 9,000 and 11,000 units/month for products A and B.
| Products | A | B | Total | |
| Sales/Unit | 9,000 | 11,000 | 20,000 | |
| Variable costs | ||||
| Indirect materials | 1,10 | 9,900.00 | 12,100.00 | 22,000.00 |
| Indirect labor | 1,50 | 13,500.00 | 16,500.00 | 30,000.00 |
| Commissions | 0,80 | 7,200.00 | 8,800.00 | 16,000.00 |
| Total V.C. | 30,600.00 | 37,400.00 | 68,000.00 | |
| Fixed costs | ||||
| Depreciation | 6,000.00 | 2,700.00 | 3,300.00 | 6,000.00 |
| Supervision | 5,000.00 | 2,000.00 | 3,000.00 | 5,000.00 |
| Maintenance | 20,000.00 | 9,000.00 | 11,000.00 | 20,000.00 |
| Total F.C. | 31,000.00 | 9,000.00 | 11,000.00 | 20,000.00 |
| Total costs | 39,600.00 | 48,400.00 | 88,000.00 |
Therefore, applying the dynamic budget can greatly facilitate the organization’s operation. Even with a certain degree of complexity, it is a great tool for the success of the budget process.
LEARN HOW TO APPLY THE DYNAMIC BUDGET
Applying the dynamic budget is a very important point, as this step is essential for the good management of the company. For example, in a cost estimate where there is a great amount of data – which increases the complexity of operations – it is interesting to develop strategies that optimize this process.
To this end, it is important to create a budget plan to obtain the projection of revenues, costs, inventories, and investments estimated in the coming years. However, before carrying out this task, you need to know your business well. This is because companies have different needs, so each plan must be adapted to the reality of your organization.
It is also important to know that this activity is not guesswork. All conclusions must be accurate and made based on the data collected, such as the business’s budget history.
Currently, there are many methods that help in the company’s budget process and financial management, such as cash flow. There are also different software aimed at controlling costs and profitability. They help in the collection, storage, and processing of data, and provide dynamism and versatility to the budget analysis of your company.
If you want to know some of these solutions, we at MyABCM work with these systems. They are aimed both at advanced implementations and simpler management.
Now that you understand the use of dynamic budget in the company and know how to apply it, be sure to have the technology to make this process easier. With it, your organization is able to optimize processes, increasing productivity, reducing costs, and improving your results. That way, it is possible to gain prominence in the market and a competitive advantage.
Was this content helpful? To improve the financial management in your business, also check out our article with 8 tips to make a perfect cash flow!
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