Operating Budget Definition: Everything You Need to Know
By Vladana Donevski
June 19, 2023
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:
- Direct labor budget
- Direct selling costs
- Sales budget: Sales volume and sales needs
- Payment processing fees
- Raw materials fees
- Some aspects of marketing
- Other market variables
Fixed Costs
Some of the fixed expenses you might include in your annual operating budget are:
- Rent for office
- Insurance
- Telecommunication
- Salaries
- 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.