Flexible budgeting is a dynamic approach that allows you to adjust in real time as costs and revenue shift. But rather than getting caught up in comparing budgeting models, it’s more useful to apply flexible budgeting principles to the parts of your plan that need them most.
If the past few years have taught SaaS companies anything, it’s that unpredictability is the new normal. The market has shown just how challenging it can be to build accurate, static budgets—and even tougher to revisit and analyze them consistently.
That’s why many companies are moving away from traditional static budgets and embracing more flexible strategies. A flexible budget helps you respond to economic shifts and global trends as they happen—instead of trying to predict the timing or impact in advance.
Because flexible budgets scale with your business in real time, they support the reality of running a growing, evolving company.
So instead of asking whether your budget should be flexible or static, incremental or strategic, ask where flexibility can have the biggest impact. Chances are, specific sections of your balance sheet or income statement could benefit from a more agile approach.
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What is flexible budgeting?
Flexible budgeting is an adaptable approach that lets businesses adjust expense limits in real time based on changes in costs, sales, production, or other key factors. It’s a hybrid method: starting with a static framework for fixed costs, then layering in flexibility to account for the variables that are harder to predict.
Instead of assigning fixed dollar amounts to every line item, flexible budgets often use a percentage of projected revenue to estimate variable costs. This makes it easier to adjust your plan based on the latest actuals—while also accounting for outside forces like market shifts, inflation, or increased competition.
Most teams revisit their flexible budgets monthly, reviewing total costs and top-line performance to update forecasts. While maintaining a real-time model takes more effort, it pays off with smarter budget allocations and faster, more informed decisions.
At the close of each period, you’ll compare projected revenue with actuals and adjust future expenses accordingly. The difference between what you planned and what actually happened is your flexible budget variance—a key metric for understanding how accurate your forecasting really is.
Flexible budget examples
Flexible budgeting is especially helpful for line items that can be tied to other parts of your forecast. When a variable cost increases—say, due to higher production or usage—the related budget line item increases, too. And if that cost decreases, the budget adjusts accordingly.
Take cost of goods sold (COGS) in a B2C business, for example. If sales double and you’re using a flexible budgeting model, you can automatically adjust COGS by a set percentage to ensure you have enough budget to cover increased output—alongside direct materials, labor, and production costs.
In SaaS, the concept is similar—but instead of COGS, it’s typically the cost of revenue. That includes expenses related to delivering your product or service, such as hosting, cloud services, and website infrastructure. As web traffic grows, hosting costs (like AWS) often rise as well. That’s why SaaS companies may link cloud spend to assumptions around customer or usage growth.
Flexible budgeting also comes into play with headcount planning. For example, if you’re forecasting team member benefits, you can tie that budget line to your headcount projections—so the benefits budget scales automatically as your team grows, based on a per-person rate.
How to set a flexible budget in 5 steps
While flexible budgeting takes more time and attention than traditional or incremental budgeting, the setup process is fairly straightforward. Here’s a five-step approach to creating a flexible budget:
- Step 1: Identify all fixed costs and assign each a consistent monthly value.
- Step 2: Determine how your variable costs respond to changes in activity—then assign a percentage of revenue or another driver to each one.
- Step 3: Build your flexible budget. Fixed costs should be hard-coded, while variable costs should adjust based on the relevant activity measures.
- Step 4: After each accounting period ends, plug actual activity data into your model. This will automatically update your variable cost projections.
- Step 5: Create a flexible budget variance report to compare forecasted expenses with actuals—helping you quickly spot gaps and opportunities.
Unlike static budgets, which rely on fixed assumptions, a flexible budget adapts in real time as business conditions change. That makes it a valuable tool for more accurate forecasting and agile decision-making.
Advantages of flexible budgeting
Flexible budgets offer several key benefits, especially for fast-moving businesses. They’re well-suited for variable cost environments, provide more detailed performance insights, and support greater efficiency for finance teams.
Provides optimal usability in variable cost environments
Flexible budgets shine in settings where costs rise or fall in step with business activity. For SaaS companies, that often includes things like hosting fees and website infrastructure. When traffic increases—thanks to marketing efforts like webinars, ebooks, or new content—those costs naturally go up. Because flexible budgets adjust in real time, they make it easier to manage these fluctuations and align spend with actual growth.
Provides a detailed picture of performance
Unlike static budgets, flexible budgets aren’t locked in. They shift as activity levels change, which means you’re always working with the most current data. That makes it easier to assess real performance, run meaningful scenario planning, and make informed decisions. The result? A more accurate, up-to-date view of how your business is doing.
Boosts budgeting efficiency
Flexible budgets make it easy to update revenue and activity figures as new information comes in. In a bottom-up budgeting process, department managers can approve fixed and variable costs as a percentage of revenue—creating space for deeper collaboration between finance, department leads, and executives on the rest of the plan. That might include things like headcount timelines or resourcing priorities across teams.
Because flexible budgets are built to adapt, they naturally support more streamlined workflows—saving time and creating alignment along the way.
Disadvantages of flexible budgeting
While flexible budgeting offers clear advantages, it also requires a higher level of attention and upkeep. Some of the most common challenges include time investment, complexity, and the potential for inaccuracy.
Can be more time-consuming
Flexible budgets take more time to maintain than traditional models. Since they require regular updates based on actuals, teams need to closely monitor changes and apply them quickly. That doesn’t mean flexible budgeting isn’t worth the effort—but it’s important to plan for the extra lift. If your company already runs regular flux analyses, you can align those efforts with your flexible budgeting process to streamline updates and reduce duplication.
Doesn’t apply to every line item
Flexible budgeting relies on strong financial assumptions, especially when linking variable line items to business drivers. But not every expense has a clear or consistent correlation. Trying to force connections where they don’t exist can create noise and reduce forecast accuracy. That’s why it’s important to choose carefully which parts of your budget should be flexible—and which are better left fixed.
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Flexible budgeting FAQs
How do you calculate a flexible budget?
A flexible budget starts with your fixed expenses, then layers in variable costs that adjust based on real-time data. Most often, variable costs are calculated as a percentage of projected revenue or another activity driver. This approach allows you to update the budget as business conditions change—factoring in things like economic shifts, increased competition, or changes in demand.
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What is the difference between a fixed and flexible budget?
A fixed budget stays the same, regardless of how business activity changes. It’s based on a set of assumptions made at the beginning of the budgeting period. A flexible budget, on the other hand, adapts. It scales in response to shifts in variable costs—expanding or contracting as needed to reflect what’s actually happening in the business.
Who uses a flexible budget?
While flexible budgeting is traditionally common in manufacturing (especially for managing overhead), it’s also a great fit for SaaS companies. For example, if a SaaS business is forecasting employee benefits, it might tie that budget line to its headcount plan—so costs scale automatically as new hires are added, based on per-person assumptions.
