Elastic Budgeting
Elastic budgeting is an approach to budgeting that takes into account expected fluctuations in the market, cost of living, and other unpredictable fluctuations. It’s an alternative to the traditional static budgeting method, which is based on an average of what has already occurred.
Elastic budgeting starts with a company’s baseline budget, which is determined by inventory, personnel, and operating costs. From there, adjustable allowances are developed for ad-hoc or periodic expenses. The total of the baseline budget, plus the adjustable allowances, includes potential flexibility and are referred to as the elastic budget.
The purpose of this type of budgeting is to better account for trends and forecasts. Every company will have different forecasting needs, so their elastic budgets will be very specific and tailored to their operations. For example, a retail shop may need an elastic budget that accounts for potential changes in the cost of goods while a manufacturer may need an elastic budget that accounts for potential changes in the cost of production materials.
An elastic budget will require regular review and adjustment. Companies must continually assess the market and their operations and make whatever adjustments to their budget are necessary. Since the market and economic environments are always changing, a company must be prepared to keep their budget up to date so that their financial resources are properly allocated and their financial goals are achieved.
Elastic budgeting has become increasingly popular in the business world as it can help a company better prepare for the future. By having an adjustable budget, a company can be better prepared to handle market fluctuations, or even sudden and unexpected circumstances.
An example of how elastic budgeting works can be seen in the retail industry. Let’s assume that a company has a monthly budget of $10,000 for advertising. That amount could be set as the baseline budget, with an additional allowance of up to $5,000 for special campaigns or promotions. That would give the company a total of $15,000 in potential expenses, which is their elastic budget.
If they find that the response to their campaigns is higher than expected, they could then increase their budget and run more campaigns. On the other hand, if they find that the response is lower than expected, they could reduce their budget accordingly.
As you can see, elastic budgeting gives companies the flexibility to adjust their budgets to changing market conditions and to take advantage of unexpected opportunities. It also gives companies the ability to plan for the future and make sure their financial resources are allocated properly.
Overall, elastic budgeting is an effective and efficient tool for companies to use in order to effectively manage their finances. By taking into account expected and unexpected market fluctuations, companies can ensure that their financial resources are being allocated correctly and that their goals are being achieved.
