Operating Budget Preparation Step-by-Step, Part 1-Sales & Cash Collections Budgets, by Mike Werner
What is included in an operating budget?
It’s crucial to understand what information to include when creating an operating budget. Most operating budgets include the following categories of information:
Revenue
The money a business earns through sales, subscriptions, and other income streams is known as revenue. The majority of operating budgets take into account particular elements of revenue, such as product volume and unit price. Additionally, it can be beneficial to consider potential revenue changes, including price adjustments, seasonal variations in demand, and marketing strategies.
Variable costs
The business expenses known as variable costs change as sales fluctuate. These expenses may include the cost of the goods at wholesale, freight, labor, and marketing. Take into account whether and how you anticipate these costs to change, taking into account anticipated modifications to the cost of materials, employee wages, and items for resale.
Fixed costs
Contrary to variable costs, fixed costs do not typically change very frequently. They consist of overhead costs like rent, utilities, and some employee salaries. Examine your accounts to see if there are any automatic payments for services like phone or software subscriptions that you might otherwise forget about.
Non-cash expenses
Non-cash expenses are the less obvious costs that have an impact on a company’s budget, such as asset depreciation. Although it is unlikely that these costs will have an impact on the operating budget, they are significant when creating end-of-year financial documents. Even if there are no non-cash expenses for the period being calculated, you might include a line for them in your operating budget to make sure you remember to account for them when they do.
Non-operating expenses
Costs that are unrelated to production, like interest and tax payments, are referred to as non-operating expenses. Depending on their relative magnitude, these expenses may occasionally be included in a budget for operating expenses.
Capital costs
Capital costs, or money spent to maintain assets like buildings and facilities, are sometimes included in operating budgets, but sometimes they aren’t. When deciding whether to include this item in your operating budget or somewhere else, take into account the impact of capital costs on your revenue and expenditures.
What is an operating budget?
A business’s financial input and output (revenue and expenses) for a given period of time are tracked in an operating budget. An operating budget is more likely to be accurate the shorter the time period it covers. Many companies finish their operating budgets for one fiscal quarter at a time, or even for an entire year. Operating budgets are used by businesses and organizations to plan business decisions and monitor changes in their financial situation.
Operating budget template
An operating budget can take different forms depending on the industry and the type of business. Nevertheless, there are components that appear in numerous operating budget documents from various organization types. Revenue, variable costs, fixed costs, non-cash expenses, and non-operating expenses are some of these typical categories. Here is a straightforward example that you can adapt to create 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, determine the numbers you anticipate for each category and enter them in the relevant rows and columns. Then, to calculate your profit for that particular period of time, deduct each series of expenses from the anticipated revenue.
Compare actual revenue and expenses to what you had anticipated after the period covered by your operating budget has passed. If necessary, you can use this comparison to modify your predictions for the future. Additionally, you can use discrepancies between anticipated and actual revenue and expenses to pinpoint areas where your company could become more profitable.
Operating budget example
You can forecast your own potential profit over a specific time period using the template above. As an illustration of how to use this template to create an operating budget, consider the following:
Joe owns a small bakery. He calculated his anticipated monthly revenue for each of the next six months using his previous monthly sales volume and anticipated prices over the course of the following year. His anticipated monthly revenue was:
Using his typical monthly sales volume and the cost of those products, Joe next calculated his variable costs. He came to the following monthly figures for his variable costs:
Joe worked out his revenue and variable expenses before calculating his fixed expenses. He estimated that these costs would be $1,500 per month because he did not expect them to vary from month to month.
When Joe looked into the potential depreciation of his oven and other assets, he discovered that they were unlikely to do so in the six months he had planned for in his operating budget. He made the decision to record $0 for non-cash expenses in his document.
Joe finally came to the conclusion that the only non-operating expense he would incur in April would be a $500 tax bill.
By including this data in his operating budget template, Joe was able to determine his anticipated profit for each of the following six months. Using this information, he was able to decide on the production scale, staffing, operating hours, 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?
- Sales.
- Production.
- Direct materials.
- Direct labor.
- Overhead.
- General and administrative expenses.
What are the four main types of operating budgets?
- Identify expenses for the month. Look at every expenditure for the entire business.
- Identify production for the month. …
- Divide expenses by production. …
- Determine revenue. …
- Subtract the cost per unit from the revenue per unit.
