Operating Budget

What is an Operating Budget?

An operating budget is a quantitative forecast of a company's sales and expenditures for a specified period. Companies often develop an annual budget near the end of the year which forecasts the financial activity for the next year.

The operational budget is the speculative arrangement that is every so often known as a budgetary plan for the upcoming year. The next year’s operational goals are set and the financials are estimated considering the running year’s budget, and the economic conditions of inflation.

Not only this, but the political, social, and technological aspects are also taken into consideration for the next budget preparations so that no area is unattended.

It is pertinent to know that the professional approach towards operating budget devising is to not forget the budget constraints that your business may face due to any reason. That reason may not be always inflation but the downward change in sales trends/decline in revenues and market demand and supply fluctuations.

Revenue and expenses are the two components that define your operating budget. Revenues are the sales cash received plus accounts receivables (credit) from the selling of goods or provision of services into the buying markets. Expenditures, on the other hand, are the expenses you incurred during your operational time of the business. This portion is deducted from the revenues to calculate the net income of your business.

Though, the expenses can be both operating and non-operating in nature and fixed as well as a variable in the phenomenon. Whereas the expenditure is further divisible into the expenses and capital expenditures. The information mentioned below would make it clearer.

What are the operating expenses?

•  COGS – Cost of Goods Sold
• Provision of information to the markets about your product and services commonly known as marketing, adverts, and promos
• Salaries and wages of your employees
• Rental expenses and administrative costs
• Insurances
• Any other per your business need     

What are the non-operating expenses?

• Taxes
• Interest
• Damages, if any

What are fixed and variable expenses?

Fixed Expenses

• Rental expenses
• Salaries (may be fixed as well as a variable at any point in time)

Variable Expenses

• Marketing and adverts (maybe both fixed or variable as the case may be: fixed when it is a continuous activity and variable when sometimes it is and other times it is stopped)
• Commission payments
• Transacting expenses

There are two types of expenditures: expenses and capital expenditures. The expenses are as aforementioned and defined; whereas the capital expenditures are the overhead costs you incurred in the buying of long-term fixed or physical assets.

What are the components of your operating budget?

The following are the components of your operating budget:

Your Business Revenue: Your business revenues are one of the major components of your operating budget. It further is divisible into two things:

• Total number of units sold
• Cost per unit spent

Costs that vary in nature: The variably costs you incur in your business activities include:

• Freight
• Direct selling costs
• Processor fees, if any
• Marketing activities characteristics
• Sales commissions
• COGS
• Labor hired directly

Fixed Costs: The business activity costs which are fixed in nature are:

• Rentals
• Insurances
• Utility expenses
• Communication charges
• Salaries and fringe benefits
• Head Quarter’s costs, if any

Expenses that are not in cash: Your assets get depreciated and are subject to amortization, such expenses are your non-cash expenses

Expenses that are non-operative: The following are your non-operating expenses:

• Tax
• Interest
• Loss or Gain

Capital Cost in the operating budget: For your company’s financial analysis Capital expenditure is excluded from operating budgets, moreover term operating means concerning operations – income statement – the organizations prepare separate budgets for capital investments     

Your concurrent operating budget is the forecasting factor for the next recurrent budget to plan for. The historical facts and figures are the keys to success for future plans when it comes to budgetary allocations.

Operating budget helps you with planning the replying to several questions like:

Q. Are the sales up to speculation?

Q. What are the reasons behind sales improvements or decline, as the case may be?

Q. Are the expenditures meeting as per the budget allocation or more?

Q. What is the recruitment budget costing you due to HR turnover?

Q. What have been the promo budget last and this year and what are the consequences?

Q. What is the inflation impact on budgetary allocations this time?

Q. What is the impact of policies and procedures of the State regulations on your budget – that might introduce some benefits for employees, hence your expense due to being the employer     

What is more for you to consider for the operating budget?

The following factors during devising your operating budget must be taken into consideration:

• State Political Situation surrounding your company
• Economic conditions of the country and the globe at large
• Societal scenario amid your business operations
• Technological advancements
• Your company’s internal Strengths
• Opportunities in the market
• Threats outside
• Weaknesses

Moreover, it is necessary to know that budget is the way forward to move from your mission to the vision in general and from your existing position to the next in the next five years. These budgets can include the labor budget, production budget, overhead budget, etc. Amidst this journey, the business plans, as well as strategic plans of your company, go hand in hand.