What is Operating Budget?
An operating budget is designed to show how a company plans to spend money over the coming fiscal year. It's a roadmap for how the company will perform over the coming year.
An operating budget is broken down into three components: expenses, revenues, and net income.
Expenses include costs for personnel, office supplies, rent, utilities, and other basic business expenses.
Revenues include any income that a business will receive. Examples of revenue include paper sales, advertising, or product purchases.
Net income is the difference between the revenues received and the expenses paid out.
The operating budget is prepared by a company’s management committee and approved by its board of directors. The operating budget is prepared by a finance department. All expenses, including payroll, are researched and estimated. These expenses are added together to arrive at a total expense.
Why are operating budgets necessary?
Operating budgets are important because they allow businesses to track their income and expenses, and make informed decisions about how to allocate their resources. Without an operating budget, a business may find itself overspending and unable to meet its financial obligations.
How Do You Create an Operating Budget?
Creating an operating budget is a partnership effort involving executives and managers. First, they must estimate the coming year’s revenue. This involves checking the firm’s historical performance and then considering market variables that could affect next year’s sales for better or worse. Among them:
- Changing trends in the industry or sector
- New products the company will launch
- Competitors’ actions
- Seasonal changes in sales
- Changes in the economy