An operating budget is a financial plan that outlines a company’s expected income and expenses for a set period, usually a year. It acts as a guide for managing day-to-day operations and helps businesses allocate resources wisely. By forecasting both revenues and costs, companies can make informed decisions, control spending, and work toward staying profitable.
What’s the difference between operating budget and revenue?
Operating budget and revenue are related but not the same.
- Operating Budget: It’s a detailed financial plan that includes projected income and all expected operating expenses, like salaries, rent, utilities, and supplies.
- Revenue: This is the total money a company brings in from sales or services, before any expenses are deducted.
In short, revenue is part of the operating budget, but the budget also includes all the costs needed to run the business.
What’s included in an operating budget?
An operating budget usually includes these key components:
- Revenue Projections: Expected income from sales or services.
- Cost of Goods Sold (COGS): Expenses directly tied to producing goods or services, like raw materials and manufacturing costs.
- Operating Expenses: These include:
- Salaries and wages
- Rent and utilities
- Marketing and advertising costs
- Office supplies and equipment
- Insurance and legal fees
- Depreciation and Amortization: Non-cash expenses that account for the loss of value of assets over time.
- Net Operating Income (NOI): The profit that’s left after subtracting all operating expenses from total revenue.
How do you plan an operating budget?
Planning a solid operating budget takes a few steps:
- Review Past Financial Data: Look at previous budgets and financial statements to spot trends and set realistic projections.
- Estimate Revenue: Forecast income based on market conditions, past performance, and future growth plans.
- List Fixed and Variable Costs:
- Fixed costs (e.g., rent, salaries) stay the same.
- Variable costs (e.g., raw materials, utilities) change based on production.
- Account for Unexpected Expenses: Add a contingency fund to cover surprises or economic shifts.
- Set Financial Goals: Define targets for growth, cost control, and profit.
- Monitor and Adjust: Keep an eye on financial performance and adjust the budget as needed to stay on track.
A well-planned operating budget helps businesses stay financially stable, optimize their spending, and support long-term growth.
