How to calculate a flexible budget

To calculate a flexible budget, determine fixed costs, determine variable costs, and figure out your total overhead costs. Here are some details on each of these steps you can take to calculate a flexible budget:

• Determine fixed costs

Your first step is to determine your fixed costs. Fixed costs are costs that will remain the same regardless of how well or poorly your business is performing. Here are some examples of common fixed costs for businesses:

• Rent payments

• Loan payments

• Mortgage payments

• Employee salaries

• Employee wages

• Business insurance and other forms of insurance

These are just examples, the specific fixed costs of your business depend on what industry your business operates in and its specific operations.

• Determine variable costs

Next you have to determine your variable costs. These are costs that can fluctuate depending on a number of different factors concerning your business. Here are some common examples of variable costs for businesses:

• Part-time worker wages

• Utility bills

• Materials, supplies, and resources

The costs for these items can vary depending on when your business experiences busy times of the year, or dips in productivity for any given reason. They can also depend on your specific production and the volume of your services. Once you have this information down, you can then attempt to calculate variable costs for your business by:

• Using the calculation for cost per unit of production (Divide the variable expenses by the number of units to get the variable expense per unit)

• Calculate other variable costs that are unrelated to production (create averages for utility costs by adding up utility bills over the course of a year and dividing by 12)

You can do this based on an annual timeframe or a different timeframe, such as a set period of months, depending on your specific needs.

• Figure out your total overhead costs

Overhead costs are expenses related to your business that do not directly relate to the cost of producing your products or services. To calculate your total overhead costs, you first need to determine the expenses that are not related to production. Then break those costs down into fixed and variable cost categories. Here are some common overhead costs:

• Shipping and transport

• Advertising and marketing

• Administrative expenses

These costs can vary depending on the specifics of your business and what industry it operates in.

Use the information in the previous steps to create a flexible budget. A common way to structure a flexible budget is to include your fixed and variable costs in one column of your budget as set numbers, then create a separate column for variance, in other words, flexibility. You should seek to periodically update your flexible budget.