Operating Budget Definition: Everything You Need to Know

ByVladana Donevski
June 15,2022

What is an operating budget? This is a question that many business owners ask themselves, so this blog post will discuss the operating budget definition, the importance of this document, and how to create one for your company.

Defining an Operating Budget

An operating budget is a plan outlining your expected expenses, revenue, and profits for a specific period. It can be helpful to think of your operating budget as your financial roadmap. Similar to a business plan, it’s meant to keep your business fund management on track.

When you create and follow an adequate operating budget, you are more likely to achieve your financial goals.

The Importance of Following an Operating Expense Budget

There are many reasons you should have one, but the crucial incentive for developing a budget is avoiding financial difficulties. When you clearly understand your expected income and expenses, you are less likely to overspend or get into debt.

How To Create an Effective Operating Budget for Your Business

There is no "right" way to create an operating budget. However, there are some key elements every sensible operating budget should include. Most operating budgets include how much revenue companies expect, variable and fixed costs, non-cash and non-operating expenses, and sometimes capital costs.

Variable Costs

The variable costs section included in the operating budget consists of:

  1. Direct labor budget
  2. Direct selling costs
  3. Sales budget: Sales volume and sales needs
  4. Payment processing fees
  5. Raw materials fees
  6. Some aspects of marketing
  7. Other market variables

Fixed Costs

Some of the fixed expenses you might include in your annual operating budget are:

  1. Rent for office
  2. Insurance
  3. Telecommunication
  4. Salaries
  5. Utilities

Your total operating budget should also include non-operating expenses, such as taxes, interest, gains, and losses.

Non-Cash Expenses

Make sure to write up non-cash expenses, like the amortization and depreciation of your assets. While these expenses won't affect your cash flow immediately, they will leave a mark on your company's income statement at the end of the reporting period.

The Elements of an Operating Budget

First, you will need to gather your company's financial data. The data used in your business budget, for example, can come from financial statements, tax returns, and bank records.

Then, you will need to analyze them to identify your business's strengths and weaknesses, as well as its expected operating cash flow for the year, to create a budget that reflects your findings.

Finally, once you have created your budget, it is essential to review it regularly. This will help you make adjustments as needed and ensure you remain on track toward your financial goals. It might seem like a hassle, but you should define your operating budget before making big financial decisions.

Tips For Staying On Track With Your Operating Budget

Even if you have the best intentions, it can be challenging to stick to your budget if you don’t consult it frequently. While unexpected expenses are to be, well, expected, and they might be significant, it still helps to document the things you can predict. Here are a few tips to make as much of that as possible:

  • Make your budget realistic. If it’s too restrictive, you will likely give up on it altogether. An operating budget with room for unexpected expenses is beneficial, especially since sales and overhead figures vary greatly.
  • Create a system for tracking your expenses. Include this in your operating budget expenditure section. This can be as simple as keeping a notebook in your purse or wallet, or using a budgeting app on your phone.
  • Review your budget regularly. This will help you identify areas in need of adjustments. 
  • Don't be too hard on yourself. If you occasionally make a purchase that’s not in your budget, don’t waste time on regrets. Return the item if it’s not necessary, or make it pay for itself. Both are good ways to get back on track.
FAQ
What are the 5 main components of an operating budget?

The five main components of an operating expense budget are revenue, costs, non-cash and non-operating expenses, and capital costs.

What is an operating budget for a nonprofit?

An operating budget for a nonprofit is a financial plan that outlines the organization's expected income - i.e., grants and other forms of financing - and expenses. The operating budget can help the nonprofit achieve its financial goals and avoid debt.

What is meant by operating budget?

The definition of an operating budget is that it’s a financial plan that details your company’s expected income and expenses for a specified period. It’s important to create and follow an effective operating budget to achieve your financial goals, avoid debt, and keep your business on track.

More From Our Blog

Creating and sending purchase orders (POs) can be daunting for inexperienced business owners. For some, it can be hard to keep track of all of them as they pile up, while others stress about filling these important documents flawlessly to ensure smooth order processing. Thankfully, there is software available that can help manage the entire process, from start to finish. Businesses can leverage technology to create and send purchase orders quickly and accurately. These systems often come with additional features such as automated reminders, tracking capabilities, and more. Our article will answer all your PO questions - e.g., What is a purchase order? Why are they important? How do they work? - and teach you about the various ways businesses use purchase orders, as well as how to create and send them yourself. Purchase Order Definition So you've heard the term many times and are wondering, “What is a PO, exactly?” In a nutshell, a purchase order is a legally binding contract created by a buyer to communicate a seller's demand for goods or services. It is generated after the buyer and seller agree on the terms of sale, such as pricing, quantity, delivery date, and payment terms. The PO serves as a formal record of the details of the transaction between the two parties and can be used as a reference in case of any disputes. POs are typically used for business-to-business transactions and can be sent electronically, via fax, or by mail. A complete PO will include all relevant information, such as vendor details, product/service descriptions, prices, delivery methods, and payment conditions. Once it is received by the seller and accepted, it becomes subject to the terms both parties must abide by. The Role of a PO in Business POs are created anytime you need to buy anything from a vendor. For example, if a company needs to buy 500 chairs for an office renovation project, it would place an order using a PO system. This ensures both parties have clear documentation outlining the specifics of the transaction. The purchase order system is essential to any successful purchasing process and helps ensure goods and services are delivered on time and per the contract terms. It also allows companies to track their spending more accurately and helps them budget accordingly. Having a purchase order system in place also ensures better communication between buyers and sellers and eliminates any confusion over what has been ordered or agreed upon. This ultimately leads to more secure transactions with less risk of misunderstandings or legal action from either side. Why Is It Important to Have a Purchase Order? Imagine you are a business owner who has just been handed a PO from a potential new client. You've never seen one before, so you're not sure what it is exactly, but you should learn how to use it. Here are some reasons buyers should know the ins and outs of POs: To make sure they’re ordering the correct items To make sure they're getting the best price possible To make sure the order is correct and can be delivered on time To keep track of buyer and vendor expenses To make sure buyers are within budget By taking the time to learn more about this vital tool, business owners can streamline their operations and improve customer satisfaction. How do POs Work? A PO is essentially a document sent from a buyer to a seller, stating the products, quantities, and agreed prices for goods or services the seller will provide to the buyer. It also serves as an offer from the buyer to purchase those products or services at the given price. The PO serves as legal protection for both parties, and it must be approved by both before any transaction can take place. Once a purchase requisition form is filled and accepted, buyers are protected from price increases or ordering errors, as all costs and terms must be clearly stated in advance. The supplier typically then sends an invoice to the buyer, which contains all of the same information as the PO. This invoice signals that the order details have been finalized and are ready for payment. Once payment is received from the buyer, it signals that all obligations regarding the PO have been completed. How to Create a PO in a Few Easy Steps Log into the company’s procurement system or software and find the purchasing order form. Fill out the PO with all the necessary information, including supplier contact info, item name, description, quantity required, unit price, total cost, payment terms, delivery terms, and expected delivery date. Once you've completed the order form and double-checked all your entries for accuracy, submit the purchase order request to management for approval. Obtain a signed copy of the approved PO from the purchasing department manager before sending it to your supplier to ensure both sides have agreed on all of its contents in writing. Forward an electronic or hardcopy version of the PO to the supplier. The supplier will confirm receipt of the PO and provide an estimated delivery date for the requested goods or services. When the goods or services arrive, check that they match what was ordered and submit payment according to the agreed-upon price. Following the purchase order process will ensure that you have a complete and accurate record of all purchases made by your purchasing department. This information can be invaluable in helping your company better manage suppliers, negotiate more favorable contracts and stay compliant with relevant laws and regulations. 10 Tips for Using Purchase Orders Effectively Planning: When issuing a purchase order, it's important to allow enough time for the supplier to fulfill the order and anticipate any delivery delays. Pay attention to detail: Make sure that all information on the PO is accurate and up-to-date, so there are no misunderstandings between you and your supplier. This includes pricing, payment terms, shipping details, product specifications, etc.  Stay organized: Keep track of all POs issued by organizing them into folders or using filing software such as Excel or Quickbooks. This allows you to quickly locate a PO if necessary and also helps with budgeting and accounting tasks. It’s also easier to rely on legal protection in case of disputes if you can easily locate all relevant documents. Follow up: If there are any discrepancies with the PO, address them immediately. This will help ensure that everything is done properly and promptly.  Use the latest technology: Automation tools such as PO software can help streamline the process by automating many of the manual tasks associated with issuing purchase orders. This can save you time and money while ensuring accuracy and efficiency. Negotiate terms: Don't be afraid to negotiate payment and other conditions that may benefit both parties involved in the transaction. Establish relationships: Good relationships with suppliers are vital for ensuring future success with purchase orders. Open communication and following up on time can go a long way toward achieving your business goals. Monitor performance: Make sure your suppliers are fulfilling their obligations according to the terms of the PO. Doing so will help you identify any areas in which improvement is needed or where alternative suppliers may be necessary. Stay compliant: Staying updated on applicable laws and regulations when issuing purchase orders is essential for remaining compliant with local, state, or federal laws. Familiarize yourself with all relevant rules and make sure that all of your purchases follow those rules accordingly. Leverage data: Analyzing the data associated with your purchase orders - be they on the buyer or seller side - can help you identify opportunities for cost savings, streamline the buying process, and improve supplier relationships. Bottom Line Using POs effectively is an essential part of any successful business nowadays. Following a strict purchase order process can help your business save time and money while ensuring accuracy and efficiency.  For example, a PO system for a small business uses automation, and tracking data from your POs can also provide additional insights and help you make more informed business decisions. By following this guide, you will be well on your way to using purchase orders effectively.
By Bojan Jovanovic · November 28,2022
It’s hard to imagine the modern world without barcodes. They are on almost every product we buy, from food to clothes to electronics. We tend to take it for granted that this technology will be there to make our lives easier.  But have you ever wondered about the history of barcode technology and barcode scanners? Have you asked yourself: When was the barcode invented, and how did it become so ubiquitous? In this article, we’ll answer those questions and take a brief look at the history of this fascinating technology. What Is a Barcode? Let’s start by explaining what a barcode is. A barcode (often spelled as two words, ‘bar code’) is a machine-readable representation of data typically used to track inventory or products. Barcodes can be found on almost any consumer product today, from food items in the grocery store to books at the library.  Barcodes work by encoding data in a series of parallel lines of varying widths. The widths of the lines are read by a scanner, which converts them into digital data that a computer can process. Before we delve deeper into the barcode history, here are the most common types:  The Universal Product Code (UPC), used on almost all retail products in the United States The European Article Number (EAN), mainly used in Europe International Standard Book Number (ISBN) A Barcode Scanner A barcode scanner employs data capture technology to read barcodes on products in retail stores, identification cards, and postal mail. A typical scanner consists of three main components: an optical reader, a decoder, and a cable connecting the two.  The optical reader is the part of the product code scanner that "reads" the lines in a barcode by shining a light on it and converting the reflected light into an electrical signal. This signal is then sent to the decoder, which converts it into digital data that a computer can read. The First Barcode We’ll take you back to 1948, the year when the first barcode was invented and created by Bernard Silver, a graduate student at Drexel Institute of Technology in Philadelphia, and Norman Woodland, an inventor and a Drexel alumnus.  The two men came up with the idea while working on a project for a local supermarket chain, whose owner asked the institute for help in developing a way to read product information automatically during checkout. The barcode history timeline continues with Silver and Woodland realizing that a system of lines and spaces could be used to encode information that a machine could read. They got the idea from Morse code, which uses a series of dots and dashes to represent letters and numbers. The initial barcode was designed as a “bull’s eye” made up of a series of concentric circles. Silver and Woodland filed a patent for their invention in October 1949, but it was in 1952 that it was patented. However, a powerful 500-watt incandescent bulb they had built into it and a bulky oscilloscope didn’t make the system practical enough for commercial use.  Collins at Sylvania and KarTrak System The next figure in the turbulent history of barcodes was David Jarett Collins, an engineer at Sylvania Electric Products Inc. He was among the first to realize a need for an automated system to track and identify railroad cars. Working on a problem, he developed a KarTrak ACI (Automatic Car Identification) system in the 1960s.  The system used a pattern of blue and orange reflective stripes applied to the sides of railroad cars. A photoelectric sensor was used to read the stripes and could automatically identify a particular car as it went by.  Collins’s system is yet another piece of the puzzle that answers the question, “When was the barcode invented?” It was a much more efficient and upgraded version of the original Woodland-Silver barcode.  The new method soon became widely accepted and was set as the US standard in 1968. However, it was abandoned in the late 1970s due to technical difficulties, high costs, and poor read accuracy. A Gamechanger - The Introduction of Lasers Collins formed the Computer Identics Corporation in search of a new market for his barcode technology. This time he turned to helium-neon lasers, which were invented in 1960 by Theodore Maiman.  Lasers are, obviously, more precise than the 500-watt incandescent bulbs Silver and Woodland were using and can be focused into a very fine beam of light. This made them ideal for reading barcodes. Much before the first barcode scanner was invented, Collins incorporated a mirror that enabled the code to be reached from multiple angles, making things much easier and more reliable.  Collins and his Computer Identics Corporation installed the new barcode scanning system at a General Motors factory in Flint, Michigan, in 1969 to monitor the production of car axles. This marked the start of barcodes’ commercial journey. UPC Is Born After the successful installation at General Motors, the next step was to develop a system to be used on all products in a store. In 1966, the National Association of Food Chains (NAFC) formed a committee to develop such a system. RCA Corporation was among the committee’s members, and as it purchased the rights to the Woodland-Silver patent, it became one of the main players in the history of the barcode. However, the winner of the unique technology race was IBM, with its linear UPC (universal product code) system, which was ultimately selected as the NAFC standard instead of RCA’s bullseye code. The UPC was first scanned commercially on June 26, 1974, on packages of Wrigley’s chewing gum at a supermarket in Troy, Ohio. The barcode had finally arrived as the standard for product identification and tracking.  The UPC code consists of 12 digits, with the first six digits identifying the manufacturer, the next five identifying the product, and the last check digit used to verify that the barcode has been read correctly. The Usage of Barcodes Today Since the barcode invention and commercial deployment, retail has never been the same. Barcodes have become an integral part of our lives and are used in various ways.  We use them to track inventory, for security purposes, in libraries, print labels, and get information about a product. In addition, barcodes are utilized in many other industries, such as health care, manufacturing, and transportation. With the development of POS systems (point of sale), barcodes have become even more important, as they are used to price and track products at the time of purchase. In libraries, books’ ISBNs (international standard book numbers) are now barcodes used to keep track of inventory. Knowing barcodes’ origin, one could barely imagine their usage in hospitals. Yet barcodes are now printed on patients’ wristbands to help reduce medication errors. Barcoded tickets are also widely used at airports and concert venues to help keep track of people and prevent counterfeiting.  Indeed, barcodes have come a long way since their humble beginnings and continue evolving as our needs change. The Introduction of QR Codes In the 1990s, barcodes took another leap forward with the introduction of QR codes (also known as matrix-based 2D codes). QR stands for “quick response,” and these two-dimensional barcodes can store more information than traditional barcodes.  They contain the finder, alignment, and timing patterns that serve to determine the code’s orientation, distortion, and coordination.  When was the matrix barcode invented, then? The QR code history started with the Japanese corporation Denso Wave in 1994 when they were developed to track vehicles during the car manufacturing process at Toyota. In the beginning, they were simple 2D codes, but they continued to develop until the Japanese Industrial Standards (JIS) registered QR codes in 1999.  Later, new forms of the code were developed: In 2004, the world welcomed the first micro QR code that could be printed in a small space. Four years later, the iQR code enabled rectangular code modules and boasted 80% higher data capacity. Finally, FrameQR was developed in 2014 and brought a “canvas area” to the code. This allowed companies to add branding and design elements to their codes more freely. Thanks to those who invented the barcode, we can now use QR technology to store website URLs, contact information, and small amounts of text. It can also be used to trigger actions, such as opening a URL in your browser or adding a contact to your address book.  The Future of Barcodes As barcodes continue to evolve, we can expect to see even more uses for them in our everyday lives. Now that we know the answer to the “How long have barcodes been around?” question, we can only imagine what the future holds for this technology.  With the advent of cloud-based inventory management software, barcodes are becoming even more important for managing products and tracking inventory in real time, no matter where you are.  We are also likely to see more uses for QR codes as they become more widely adopted. So, whether you’re using a barcode to keep track of your inventory or scanning a QR code to get information about a product, there's no doubt that these little symbols are here to stay. Final Thoughts A combination of barcodes and barcode scanners is critical to managing inventory for businesses of all sizes, especially in the grocery industry. With a long history that dates back to 1948, barcodes have come a long way, and they continue to evolve as our needs change. Laser technology made it possible to read barcodes much faster, and the QR code was introduced in the 1990s to store even more information. Today, barcodes are used in many industries, such as health care, manufacturing, and transportation. We hope you won’t take them for granted the next time you see them. In this article, we explored who created the barcode and how its history brought it to its important place in business today.
By Danica Djokic · November 22,2022
Do you ever wonder how those little black-on-white lines can hold so much information? Or how do barcodes work, and why are they so important to businesses? In this article, we will explore the world of barcodes and learn how these simple markings can do so much. Stay tuned for an in-depth look at one of the essential pieces of technology in the modern world. What Is a Barcode? A barcode is a machine-readable code in the form of numbers and parallel lines printed on product packaging. Barcodes were first developed in the 1970s from an earlier idea based on Morse code. They have since become an essential tool for businesses of all sizes. Barcodes can be printed on labels or directly onto products and are read by scanners that are connected to a computer system. Barcodes are used extensively in retail and have helped streamline the checkout process. In addition, barcode technology can be used to track inventory levels and product movement throughout the supply chain. As barcodes become more ubiquitous, they are also being used in other industries, such as health care and manufacturing. How Does a Barcode Work? Barcodes are read by optical scanners that use a beam of light to scan the code. The scanner converts the light reflections into electrical impulses sent to a computer system. The computer system then decodes the impulses and translates them into the product information stored in the barcode.  What’s also important to note is that barcodes can store a large amount of information in a very small space. This means that businesses can track a variety of product data, such as price, color, and size. Types of Barcodes All barcodes can be split into two categories - linear and two-dimensional. Linear barcodes, also known as one-dimensional (1D) barcodes, are the most common type. They are composed of a series of parallel lines that represent numbers or other characters. Two-dimensional barcodes are less common but are becoming more popular due to their ability to store more information. These barcodes are composed of a series of dots or squares that can be read in two dimensions. Now, let’s take a closer look at the different barcode types. UPC The most common type of 1D barcode is the Universal Product Code (UPC). UPC barcodes are used extensively in the retail industry and can be found on nearly every product sold in a retail store.  The universal product code consists of 12 digits divided into two parts: The first six are the manufacturer’s identifier, and the last six are the product’s identifier. The UPC barcode is printed on every product sold in stores and is a vital part of the retail industry. Thanks to the UPC, retailers can efficiently track inventory and sales and ensure that customers get the right products. EAN Code The European Article Number (EAN) is another 1D barcode example used extensively in Europe. EANs are very similar to UPCs but have a few key differences.  EANs are composed of eight or 13 numbers depending on the product size. If the product is small, such as a book, it will have an 8-digit EAN. If the product is larger, such as a piece of furniture, it will have a 13-digit EAN. These numbers combine a country code, company code, and article number, while the last digit represents the check digit. EANs are often used on products sold internationally, as scanners in any country can read them. This makes them a vital part of the global supply chain. Data Matrix Code Data Matrix codes are 2D barcodes that can encode a large amount of data in a small space. They are made up of black and white squares that form a big square or rectangle and are used in industries where tracking and traceability are critical. These codes have a maximum encoding capacity of 3,116 numerical characters and 2,335 alphabetic characters. Each Data Matrix has its own perimeter finder and timing pattern, and they are made up of square or rectangular blocks of black and white cells. Data Matrix codes may store both large and small symbols. A barcode scanner can more easily read the code if there is a blank space around its perimeter. PDF417 Code PDF417 is a type of 2D barcode used to store information. The name stands for Portable Data File 417. PDF417 codes are used in various contexts, including but not limited to driver’s licenses, passports, and other identification documents.  The information stored in a PDF417 code can include text, numbers, and other data. These codes are read by scanning them with a barcode reader. The reader decodes the information, displays it on a screen, or prints it out.  PDF417 codes are also used in some financial transactions, such as mobile payments. In these cases, the code typically represents a unique identifier for the transaction. PDF417 codes have been used since the early 1990s and are now one of the most common barcode types. QR Code QR codes are becoming increasingly popular, especially as a way of sharing information or accessing content quickly and easily. But what exactly is a QR code? Simply put, a QR code is a two-dimensional barcode that can be read by a smartphone or other devices with a camera.  When scanned, the QR code will direct the device to a specific website or online content. QR codes can be used for various purposes, including sharing contact information, providing directions, or linking to a video or social media account.  Businesses have also begun using QR codes to offer customers special deals or promotions. While QR codes are most commonly used with phones, they can also be scanned with laptops and tablets. So, the next time you see a QR code, go ahead and give it a try. Benefits of Using Barcodes Barcodes have become essential to modern life, appearing on everything from groceries to library books. While they may seem like a simple way to handle inventory tracking, barcodes offer businesses various financial benefits. Here are some of the key benefits of using barcode systems: Improved accuracy: Barcodes can be read quickly and accurately, which reduces the chances of human error. This is especially important for businesses that need to track a large number of items. Reduced costs: Using barcodes can help businesses save money on labor costs associated with inventory management. Barcodes can also be used to automate the ordering process, which can lead to further cost savings. So if you’re unsure how to use a barcode system, consider hiring a professional to help get you started. Faster transactions: Barcodes can be read quickly, which helps speed up transactions. This is especially beneficial for businesses that experience high volumes of traffic, such as supermarkets and department stores. Improved customer service: Barcodes can help businesses keep track of sales data and customer purchase history. This information can be used to improve marketing efforts and customize the shopping experience for individual customers. Improved security: Barcodes can be used to track products and prevent theft. This is especially important for businesses that sell high-value items or handle sensitive information. As you can see, barcodes offer a variety of financial benefits for businesses, large and small. How Does a Barcode Scanner Work? A barcode scanner is a device that can read and interpret barcodes. It encodes the data from the barcode into a form that a computer can read. The computer then uses this data to look up information about the product, such as the price, in a database. Barcode scanners come in various shapes and sizes, but they all work using the same basic principle. So, how are barcodes read? A barcode scanner contains a light source, a photosensor, and an electronic decoder.  The light source is used to illuminate the barcode. The photosensor is used to detect the reflected light from the barcode. The electronic decoder is used to interpret the data encoded in the barcode. Barcode scanners can be handheld or fixed. Handheld barcode scanners are portable devices that can be held in one hand while scanning barcodes. Fixed barcode scanners are mounted on stands or other surfaces and are used to scan barcodes placed within the scanner’s range. Barcode scanners are commonly used in retail settings for pricing and inventory control. However, barcode scanners can also be used for other purposes, such as tracking assets or collecting data. Final Thoughts Barcodes are essential to many businesses, helping track inventory and product movement throughout the supply chain. By understanding how they work, you can ensure you’re making the most out of them. There are different barcode types, so choose the one that best suits your needs.
By Nikolina Cveticanin · November 21,2022

Leave your comment

Your email address will not be published.


There are no comments yet