What is a Business Operating Budget?

An operating budget is a detailed projection of what a company anticipates its revenue and expenses will be over a quarter or year. The operating budget is forecasted, or predicted, a financial statement of all the income and expenses it expects during a specified period.

An operating budget shows the company’s projected revenue and associated expenses for an upcoming period – usually the next year. An operating outlines the funds you need to make your business run efficiently and successfully during a period. Within the budget, business entities will account for all costs and necessary expenditures.

No company can meet its potential without an excellent operating budget. Companies that recognize the importance of their operating budget and work diligently to keep the budget current and updated achieve their business goals with more speed.

However, many business owners remain hazy at best and uninformed at worst about what an operating budget truly consists of.

In this article, Nakase Wade’s business attorney in San Diego will go over the proper definition of a business operating budget and identify the elements of a successful budget. We will also go over how businesses can create a useful operating budget and answer other popular questions about operating budgets for all businesses.

Why Do Companies Need An Operating Budget?

An operating budget helps you plan for the day-to-day operations of your business so you don’t run into a financial ditch. Businesses of all sizes use operating budgets to decide where and when to allocate funds, make sure all expenses are covered, and keep things running. A company’s operating budget is a comprehensive projection or snapshot of what the business expects to accomplish over a future period. Here is an example of a operating budget from the City of San Diego. Specifically, operating budgets typically reflect the company’s expected profits and revenue and the expenses the company will pay.

When Do Companies Create Operating Budgets?

Typically, businesses create their budgets around the end of the calendar year. This schedule allows the company to analyze the past year’s activities and issue projections about the upcoming months. As for exact dates, these are best left up to the specific company since different businesses have different routines and priorities.

What Are Operating Budgets Important for Businesses?

When prepared correctly, an operating budget can aid companies in establishing and fulfilling reasonable, practical business goals.

Operating budgets are based on projections, but the best are grounded in facts and research. Therefore, company analysts compare performances, outcomes, and other statistics from preceding quarters to develop a realistic budget for the current year and future proceedings.

When businesses gather information correctly, they continually reference and update their budget projections. In this manner, operating budgets are cyclical. Each month, company supervisors compare real, documented outcomes to budgetary predictions. Then, managers analyze the business’ results using several key questions. A realistic operating budget for the business depends on asking the right questions. Here are a few suggestions for productive questions to ask:

Are sales better or worse than expected
Can we identify spending that was not projected?
Are the projected figures for the next quarter accurate?
Do we need to revise the projected figures for the next year?

Questions like this aim to encourage companies to continually update their goals and expectations. Of course, the business world is constantly in flux, just like the economy and the stock market. Still, the ongoing analysis of past and present results helps companies set meetable goals and continue to grow.

What Are the Five Main Components of an Operating Budget?

When businesses prioritize operating budgets, the budget becomes a true asset. Of course, budgets differ based on the company and its needs. Still, many operating budgets include a summary of all activity and a collection of smaller “sub-budgets” that help clarify the main overview.

Different businesses require different budgets because not all businesses spend or wish to save similarly. However, we can break the main characteristics of an operating budget into five essential elements:

Revenue

Company revenue encompasses all of the manners through which the business earns capital. For example, businesses earn money by selling items or services, and when the company looks at projected revenue, it attempts to predict how sales will go.

Some companies project revenue for the next year, but we suggest dividing revenue into categories, such as volume of units sold or average price. Using specific categories may take a little longer, but the budget projections typically skew more accurately.

Non-Operating Expenses

Expenses considered “non-operating” are just that—they are expenses unrelated to the company’s main processes. For example, many companies pay interest payments and must include those in their budgets. Other non-operating expenses include currency exchange costs and losses on asset disposition.

Most companies do not include capital expenses when compiling an accurate operating budget. Why? Capital expenses are considered part of long-term costs, and budgets focus mostly on short-term expenses and payments.

Fixed Costs

Fixed costs are company expenses that rarely change. Companies must pay fixed costs regardless of whether they make or lose money. Examples of fixed costs include utilities, insurance, rent or mortgages, and leases for company equipment. For example, a T-shirt company that uses four printing machines may pay rent on the machines, regardless of how many T-shirts they print.

Variable Costs

A company’s variable costs fluctuate based on how many sales the company makes. For example, a company that provides employees with sales commissions will pay more commissions based on an increase in sales. Variable costs include raw materials, freight, shipping, and labor.

Non-Cash Expenses

Non-cash expenses depend on the company but often include deferred income tax and amortization or slowly writing off an asset’s primary cost.

What is the First Step in Preparing an Operating Budget?

Creating a successful operating budget assumes many forms, but overall, think of it as a group effort between managers, supervisors, and higher-level executives.

Everyone must come together and evaluate the expected revenue for the coming year. At this point, company heads assess the business’s past performance and then attempt to estimate how the market will change in the coming year.

Many different schools of thought figure into this process and managers and executives must conduct thorough research and try to predict new trends. From economic predictions to new regulations, businesses must consider every factor. Here are some of the concepts that companies investigate when putting together their new budget:

New industry trends
Economic fluctuations
Plans for new company items and services
Competitors’ new products and sales plans
Seasonal changes in sales
Cultural trends

Next, the company must look at new costs. For example, how much will it cost to carry out the company’s plans for updated employee computers next year?

Once managers develop a figure for predicted expenses, they better understand what the new budget should include and exclude. Then, they can factor in old, predicted expenses such as rent and tax payments.

Lastly, companies take one more look at the market, sales history, and other historical figures to understand what the next year will mean for the business.

How Can Contact a Business Attorney Help?

Creating a viable operating budget can be challenging, especially for busy companies. Collecting and analyzing all of the necessary figures, facts and projections are time-consuming, and there is no guarantee that the budget will be 100% accurate.

However, all businesses rely on their yearly operating budgets. When the company completes its operating budge correctly, this action can increase productivity and profits; when company executives have a strong sense of where the business has been and where it is going, they can more confidently make important decisions.

At Nakase Wade, our California lawyers and corporate attorneys pride ourselves on assisting clients from all over the state. We help businesses prosper, and we help individuals succeed again and again. Contact us for a free consultation today, and let’s get started together.

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