Budgets are estimates of the amount of money that a business or other organisation takes in and puts out within a given period of time. Budgets are meant to allow managers to better plan for the business's future. However, while some budgets use precise, others include variables. Unlike static budgets, so-called "flexible" budgets allow for changes from various levels of activity in the business, such as shifts in sales volume. Advantageous in some cases, flexible budgets also have some downsides.
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Makes Prediction Difficult
Perhaps the main disadvantage of a flexible budget is that, by not allowing the manager to insert set figures, prediction is difficult. Instead of looking at an estimate of what to expect financially, the manager is left looking at a range of estimates. Because his decision-making may be different if the number is at one end of the range than if it's at the other, a flexible budget limits his ability to plan.
Too Many Variables
When one variable in a flexible budget is subject to changes, other variables in the budget can also change, too. For example, if a flexible budget allows for changes in the volume of sales, then changes in sales will change the budget for related costs, such as upkeep of equipment and labour. So, even if there is only a single variable in a flexible budget, other items may be left opaque as well.
Can't Estimate Taxes
One of the main downsides to flexible budgets is that it makes the estimate of an organisation's tax burden tough. Many organisations make estimated tax payments, in which they pay money to tax collecting agencies on a quarterly basis instead of at the end of the year, so as to avoid interest payments. Not being able to estimate how much the company will earn makes it extremely difficult to set aside an appropriate amount of tax money.
Because flexible budgets require the preparer to insert a range of estimates, the budget may be more complicated and take longer to prepare than a static budget. A static budget requires simple arithmetic, and a flexible budget requires algebra. In many cases, flexible budgets may not just take more time to put together, but be more difficult to understand.
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