An operating budget is a detailed projection of all the expected revenues and expenses during a certain period, usually a fiscal year, for a company’s core operations. The operating budget is a part of the master budget and focuses on the day-to-day operations of the company.
An operating budget typically includes:
- Revenue Budget: This is a forecast of the company’s sales revenue for the period. This is often broken down by product line or sales channel.
- Cost of Goods Sold (COGS) Budget: This includes all the direct costs related to producing the goods or services sold by the company.
- Operating Expense Budget: This includes all the indirect costs that are not directly tied to production but are needed for operations. Examples include salaries, rent, utilities, marketing expenses, and administrative expenses.
- Budgeted Income Statement: This is a projection of the company’s income statement for the period, based on the revenue and expense forecasts.
The main purpose of an operating budget is to help the company plan for its short-term financial and operational goals. It provides a roadmap for the company to follow throughout the fiscal year and serves as a tool to measure actual performance against expected performance.
Creating an operating budget involves understanding historical data, analyzing market conditions, and making educated assumptions about future sales and expenses. It is typically prepared by the company’s management team and approved by the board of directors. It may be adjusted periodically throughout the year as business conditions change.
Example of an Operating Budget
Let’s use a fictional company, for example, FreshBake Inc., a bakery business, to illustrate an operating budget for a given year:
FreshBake Inc. is preparing its operating budget for the upcoming fiscal year. The management analyzes their sales data and market conditions to project the following:
- Bread Sales: $500,000
- Pastry Sales: $300,000
- Beverage Sales: $200,000
- Total Projected Revenue: $1,000,000
Cost of Goods Sold (COGS) Budget:
- Bread Production Costs: $200,000
- Pastry Production Costs: $120,000
- Beverage Production Costs: $50,000
- Total Projected COGS: $370,000
Operating Expense Budget:
- Salaries and Wages: $200,000
- Rent: $60,000
- Utilities: $20,000
- Marketing Expenses: $30,000
- Administrative Expenses: $40,000
- Total Projected Operating Expenses: $350,000
Based on the above figures, FreshBake Inc. would then construct its Budgeted Income Statement:
- Total Revenue: $1,000,000
- Minus Total COGS: -$370,000
- Equals Gross Profit: $630,000
- Minus Operating Expenses: -$350,000
- Equals Net Operating Income: $280,000
Thus, FreshBake Inc.’s operating budget projects a net operating income of $280,000 for the upcoming fiscal year. Throughout the year, they will compare their actual sales, COGS, operating expenses, and net operating income to these budgeted amounts to measure their performance and make any necessary adjustments.