Creating an Operating Budget (With Template and Example)

What’s an operating budget?

Operating Budget Preparation Step-by-Step, Part 1-Sales & Cash Collections Budgets, by Mike Werner

What is included in an operating budget?

When you prepare an operating budget, it is important to know what kinds of information to include. Most operating budgets include the following categories of information:

Revenue

Revenue is the money a business brings in via sales, subscriptions and other income streams. Most operating budgets account for specific components of revenue, including volume of product and unit price. It can also be helpful to think about potential revenue changes, such as price adjustments, seasonal fluctuations in demand and marketing plans.

Variable costs

Variable costs are the business expenditures that change when sales change. These costs can include the wholesale cost of items sold, freight, labor and marketing. Consider if and how you expect these costs to fluctuate, including expected adjustments to the cost of materials, employee wages and items for resale.

Fixed costs

Fixed costs, unlike variable costs, do not typically change very frequently. They include overhead expenditures such as rent, utilities and certain employee salaries. Consider reviewing your accounts to find any automatic payments for things like phone service or software subscriptions that you might otherwise overlook.

Non-cash expenses

Non-cash expenses are the less tangible expenditures that affect a businesss budget, such as the depreciation of assets. Although these expenses are unlikely to affect the operating budget itself, they become relevant when preparing end-of-year financial documents. You might include a line for non-cash expenses in your operating budget, even if you dont have any for the time period you are calculating, to ensure that you remember to account for them when they do arise.

Non-operating expenses

Non-operating expenses are the costs that are unrelated to production, such as interest and tax payments. These costs are sometimes included in an operating budget, depending on their relative magnitude.

Capital costs

Some operating budgets also include capital costs, or money spent to maintain assets such as buildings and facilities, but some do not. Consider the impact of capital costs on your revenue and expenditures when deciding whether to include this item in your operating budget or elsewhere.

What is an operating budget?

An operating budget is a document that accounts for a businesss financial input and output (revenue and expenditures) for a specific amount of time. The shorter the period of time covered by an operating budget, the more accurate that budget is likely to be. Many businesses complete operating budgets for a fiscal quarter at a time, for example, or even up to a year. Companies and organizations use operating budgets to plan business decisions and keep abreast of changes in their financial situation.

Operating budget template

The format of an operating budget can vary from one industry to the next and from one business to another. That said, there are elements that are used in many operating budget documents across a variety of organization types. These common categories include revenue, variable costs, fixed costs, non-cash expenses and non-operating expenses. Here as a simple template you can use to help write your own operating budget:

MonthMonth 1Month 2Month 3Month 4Month 5Month 6Revenue

Variable costs

Fixed costs

Non-cash expenses

Non-operating expenses

Profit

To use this template, calculate your expected figures for each category and insert those numbers into the appropriate row and column. Then, subtract each series of expenses from the anticipated revenue to determine your profit for that specific period of time.

After the time covered by your operating budget has passed, compare actual revenue and expenditures with what you previously anticipated. You can use this comparison to adjust your projections for the next period of time if necessary. You can also use differences between expected and actual revenue and expenditures to identify areas where your business could be more profitable.

Operating budget example

Using the template above, you can forecast your own potential profit over a specific period of time. Here is an example of how you can use this template to calculate an operating budget:

Joe owns a small bakery. Using his previous monthly sales volume and projected prices over the course of the next year, he determined his anticipated monthly revenue for each of the coming six months. His anticipated monthly revenue was:

Then, Joe figured out his variable costs based on how many units he usually sold each month and the price of those items. He determined his variable costs to be as follows for each month:

After determining his revenue and variable costs, Joe calculated his fixed costs. He did not anticipate these costs to change month-to-month, and he calculated those costs to be $1,500 per month.

Joe investigated the potential depreciation of assets such as his oven and other equipment, and found that they were unlikely to depreciate in the six months he wanted to project in his operating budget. He decided to omit non-cash expenses from his document by recording $0.

Finally, Joe determined that his only non-operating expenses would be an anticipated $500 tax bill in April.

Joe was able to add this information into his operating budget template to calculate his expected profit for each of the upcoming six months. He was able to use this information to make decisions about operating hours, staffing, production scale and purchasing.

MonthJanuaryFebruaryMarchAprilMayJuneRevenue$4,000$3,500
$3,500$3,000$3,500$4,000Variable costs$1,000$750$750$500$750$1,000Fixed costs$1,500$1,500$1,500$1,500$1,500$1,500Non-cash expenses$0$0$0$0$0$0Non-operating expenses$0$0$0$500$0$0Profit$1,500$1,250$1,250$500$1,250$1,500

FAQ

How do you determine operating budget?

Although they can vary, some of the main components of an operating budget include the following sections:
  • Sales.
  • Production.
  • Direct materials.
  • Direct labor.
  • Overhead.
  • General and administrative expenses.

What are the four main types of operating budgets?

Creating an operating budget is a fairly simple task for any business owner.
  1. Identify expenses for the month. Look at every expenditure for the entire business. …
  2. Identify production for the month. …
  3. Divide expenses by production. …
  4. Determine revenue. …
  5. Subtract the cost per unit from the revenue per unit.

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