Strategic planning is a long-term process and, therefore, requires flexible budgets. Although the strategic plan evaluation may take place annually, the company’s mission, vision, and values are futuristic in nature. It is quite difficult to predict the activities such as hiring, management, purchasing, as well as other emerging issues that require capital. The use of fixed budget presumes that these factors remain constant. That is rarely the case. Therefore, the business has no other option other than using the flexible budget. A flexible budget would allow the firm to adjust predictions accordingly. That help in averting losses and other unforeseeable adverse effect on the welfare of the company.
There are many changes in the business environment (“Budgeting Tools,”2015). There is a need of structural, and managerial adjustments that the flexible budget accommodate so as to gain from the changes in the environment (Walther and Skousen, 2009 p. 34). For example, a transport firm experience fluctuating changes in the price of gasoline. If the budget is fixed, the company may not adjust appropriately to the changes and may end up making losses. However, a flexible budget allows for changes in the mode of transportation to assist in maintaining the profitability of the enterprises.
Besides, the flexible budget is used for control and evaluation. Changes in volumes usually have far-reaching effects on the performance. Fixed budgets, unlike flexible ones, do not give managers the luxury to control cost to enhance the overall performance. Additionally, the flexible budgets make it easy to evaluate the profits within short-terms in the process of implementation of the strategic planning (“Flexible Budgets and Overhead Analysis,” n.d). It is critical to note that the process of implementation of the strategic plans involves periodical reviews that accompany changes. These changes have capital implications that the flexible budget can accommodate.
Budgeting Tools. 2015. Retrieved on July 19, 2015 from http://www.accountingtools.com/flexible-budget
Flexible Budgets and Overhead Analysis. Retrieved on July 19, 2015 from http://www.mheducation.ca/college/garrison5/graphics/garrison5mag_student/slideshow/ sld11.pdf
Walther L. M., and Skousen J. C. (2009). Budgeting and Decision making. Retrieved on July 19, 2015 from http://www.imd.edu.kh/budgeting-and-decision-making.pdf