There are a number of different types of business budgets. One kind of budget that your business may have is an operating budget. Read on to learn what is an operating budget and what to include in yours.
What is an operating budget?
An operating, or operational, budget outlines the funds you need to make your business run efficiently and successfully during a period. It consists of all revenues and expenses your company expects to use for its operations.
Operating budgets typically break down things like fixed and variable costs, revenue, and other expenses.
Like with a regular business budget, many businesses tend to create their new annual operating budget at year-end. That way, they can plan out their budget for the entire year and set financial goals. However, nothing is set in stone. A business may tweak its operating budget throughout the year (e.g., each month) to ensure it’s up-to-date with any operational changes.
Creating an operating budget can be beneficial for your small business. An operational budget can:
Help you manage current expenses Project future expenses Reduce business debt Establish financial accountability Help your business stay on track Operating budget components
Operating budgets can vary from business to business. Some businesses may need different or additional parts to their budget than others.
A number of other budgets make up your operating budget. Although they can vary, some of the main components of an operating budget include the following sections:
Sales Production Direct materials Direct labor Overhead General and administrative expenses Sales budget
Part of your operating budget is making a sales budget. Your sales budget lays out a projection of how many services and/or products your business will sell and how much revenue you’ll earn from those sales.
Projecting your business’s sales allows you to plan and make adjustments to your spending.
To create your sales budget, start by making a list of all of the products and services your company sells. Also include each of their price points. After you make your list, take a look at your previous year’s sales figures to project how many of each product/service you plan to sell each month in the upcoming year.
Keep in mind that things like the economy, pricing policies, and competitors can impact your sales budget. Think about these factors when creating your sales budget.
Another component of an operating budget is the production budget. Your production budget tells you how many units of each product to produce to meet sales needs and inventory requirements.
Your product and sales budgets go hand-in-hand. Use your sales budget to help create your production budget (e.g., units you expect to sell during the year).
To put together an annual production budget, gather the following information:
Expected number of units to be sold (based on last year’s data) Required level of ending inventory Number of units in your beginning inventory, if any
Calculate the number of units to produce for each product by using the formula below:
Units to Produce = Expected Unit Sales + Units in Ending Inventory – Units in Beginning Inventory
Use the formula to calculate the number of units your need to produce for each of your goods.
Your production budget also helps determine other aspects of your operating budget later on, including your directContinue reading