Quick Insight
Growing companies must decide how to authorize additional expenses in a budget year. Conditional budgeting is one way to release additional resources as revenues increase.
Conditional budgeting provides a pre-approved method for allowing increased expenses as revenues or net income increases. Approving large expenses when revenues are uncertain is a recipe for losses when revenues fail to materialize.
Conditional budgeting keeps expense increases tied to increasing revenues. This gives companies the agility to scale up when revenues skyrocket while keeping costs low when revenues falter.
There are two underlying principles of conditional budgeting:
1.Expenses are released based on the priority level related to revenue and cash flow. Resources are only to be authorized when there is a positive cash flow or income.
2.Analysis of an effective budget focuses on pinpointing the right time to release resources instead of evaluating deviations. Members of management and business owners must have pre-determined arrangements on the timing of resource authorization.
Conditional budgeting is a good option for companies with very uncertain revenues or that are quickly scaling.
- Rob Stephens
Founder of CFO Perspective and the Finance and Strategy Toolkit (FAST)
Further Insight
- Budgeting Methods on FutureLearn
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CFO Perspective Resources
Get all the CFO Perspective resources with a FAST (Finance and Strategy Toolkit) membership.