An operating budget helps the management to envision the expenses and the income necessary to run the current operations of a business entity. This BusinessZeal article describes the concept of operating budget along with an example that will help you to understand it better.
|An operating budget helps the management or the entrepreneur in forecasting the operating profits of the organization for a given time frame. A comparison with the actual profits helps them analyze the reasons of variance and take corrective actions, in case of an unfavorable variance.|
An operating budget can be described as a budget that forecasts the expenses and income of an entity to run its current operations for a specific period. It implies that it excludes the capital expenditure and incomes that are long-term in nature. It is not possible for any organization to survive without incurring revenue expenses and without earning revenue. An operating budget monitors only the revenue transactions of a business entity.
An operating budget may be further divided into other sub-budgets, such as the sales budget, expenses and revenue budget, etc. It can be prepared on a monthly, quarterly, six-monthly, or yearly basis, depending on the budgetary cycle of your organization and the peculiarities of your business. Thus, with the help of an operating budget, you can estimate the profits of your organization.
Given below is an example of an operating budget calculation. (The name of the enterprise and the data are hypothetical.)
|Particulars||Budget (Amount In $)||Actual (Amount In $)||Variance (Amount In $)|
|Other miscellaneous income||2,500|
|Total operating income (A)||42,500|
|Books and Periodicals||5,000|
|Repairs and Maintenance||800|
|Seminar and training||2,000|
|Other miscellaneous expenses||1,500|
|Total Operating Expenses (B)||30,700|
|Estimated Profit (A – B)||11,800|
Note: Payroll expenses are inclusive of salary, medicare, and other social security benefits payable to the employee.
An operating budget can be made more complex and comprehensive by structuring it in a different or more detailed way. For example, sales can be made more detailed by classifying them on the basis of geographical segments. The nature and complexity of the budget depends on the structure of your organization and the budget items differ as per the business type.
|Preparing an Operating Budget
◾ Preparing a budget requires expert-level knowledge of the business and the industry. Collect information of the operating and allied activities of the business.
Of course, the above-mentioned guidelines are for a simple business plan and it is relatively easier for an entrepreneur of a small business to design an operational budget. However, large organizations have complicated structures and the operating budget needs to be carefully analyzed and be detailed. A lot depends on the skill of the person making the budget. Usually, it is designed by the top-management with the help of the chief accountant or the manager of the budget department.
|Operating Budget Vs. Capital Budget
An operating budget projects only the estimates of expenses and income for the current operations. ‘Operations’ of any entity refers to the revenue-generating activities of the organization. Thus, it considers only the revenue items and not the items which are capital in nature. To know the difference between revenue and capital expenditure, you can refer to our article on the difference between capital and revenue expenditure. As the name suggests, a capital budget forecasts the capital expenses and revenues of any organization, i.e., items of a long-term nature. For example, your organization may be planning to initiate a new project, for which you need to invest in buying new machinery. In such scenarios, the capital budget comes into picture. However, as compared to an operating budget, a capital budget may have fewer line items. Both are needed by the management to predict the financial health of the organization.
An operating budget helps you keep a tab on the revenue expenses and income of your organization. The reasons for variances must be analyzed. However, it must be taken into consideration, that an unfavorable variance does not necessarily imply mismanagement of resources. There can be certain unforeseen circumstances that may result into dumbfounding results, or it might be the result of an error in prediction by the budget-maker. In normal circumstances, the management can detect possible cases of wastage of resources, misapplication of funds, fraud, etc. through the variances. Whatever the case may be, an operating budget is an effective tool for financial planning.