Operating Budget

When it comes to running a business, a lot of things come into play. One of the most crucial elements to iron out is finances. How much are your raw materials? How much is your equipment? Do you rent an office space? Add that in as well. Do you have an idea how much money you are poised to make in the next six months to a year? Answering these questions may seem intimidating at first. However, it’s needed to be on top of your business finances. Let’s talk about one of the basic things you need to have, the operating budget. 

What is an “operating budget”? 

An operating budget is an approximate or a projection of all expenses and revenue an organization expects to have in a specific period. It is a detailed financial statement that companies typically create towards the end of the year to prepare for expected activity the following year. In this way, they can set realistic goals and plan for the whole year. While an operating budget is developed mindfully, it is not always an exact prediction. Companies can adjust the operating budget as needed throughout the year. 

Why is it important? 

Having an operating budget is beneficial to businesses. It allows companies to look at the big picture and establish business and financial goals. Specific targets can be set and reviewed every month or every quarter depending on the company’s needs. Managers can compare their results from the projected figures and act accordingly. 

Additionally, an operating budget helps companies project future expenses and manage current ones. In doing so, they can uphold financial accountability and pinpoint exactly where the money is going and where it should be going. Overall, an operating budget helps companies stay on track, adapt to changing circumstances, strategize carefully, and achieve business targets. 

What makes up an operating budget? 

An operating budget’s details and components can differ from one company to another. Of course, it will depend on their business needs. While no two operating budgets are the same, here are some elements that are common in an operating budget: 

• Revenue: includes all ways in which a company earns money by selling goods and services. This is a list of all possible sources of income. This can be as simple as a yearly revenue forecast. However, the more detailed it is the better. It can be broken down into unit volume and average price.

• Variable costs: these are the expenses that can change with sales volume such as raw materials, labor, and sales commissions, among others. 

• Fixed costs: the expenses that remain constant. It does not matter if sales are up or down, fixed costs have to be paid. Examples of fixed costs are rental fees for office space, insurance, and equipment leases. 

• Non-cash expenses: examples of non-cash expenses are amortization, stock-based compensation, and deferred income taxes. 

• Non-operating expenses: the expenses that are not directly related to a company’s main business activity such as interest payments. 

How is an operating budget developed? 

Developing an operating budget is a team effort. It is not formulated by the CEO or business owner alone but by the collective effort of managers from different departments. The initial step in making an operating budget is to estimate the revenue for the coming year. Doing so entails reviewing historical performance and evaluating how other factors can influence revenue. These factors include trends in the industry, economic changes, business moves of industry competitors, and new products. 

The next part involves estimating expenses. Different managers can identify the expenses of their departments. This includes studying historical data and market variables as well. Finally, the last step is consolidating all the information and organizing it in a unified format.