Definition
An operating budget is a detailed plan that outlines projected income and expenses for a business over a specified period, usually a fiscal year. It includes all daily operational expenses such as cost of goods sold, wages, and overhead costs. Moreover, revenues from core business operations are also estimated, providing a comprehensive view of the company’s expected profit or loss.
Key Takeaways
- An operating budget refers to the detailed projection of all the revenues and expenses of a company during a specific period, usually the upcoming fiscal year. It is used as a tool for business planning, performance evaluation, and control.
- The operating budget outlines the costs of running the daily business operations and includes various categories, such as revenues (sales), variable expenses (direct materials, direct labor), fixed costs (rent, utilities), and non-cash items (depreciation).
- The creation of an operating budget requires careful analysis and planning. It’s usually prepared by the company’s management and serves as an invaluable tool to align the organization’s financial goals with its strategic objectives. The operating budget should be reviewed and updated regularly to reflect the realities of the business environment.
Importance
The finance term ‘Operating Budget’ is important because it outlines the planned revenues and expenses for a specific period, usually a fiscal year, for a company’s operations.
This budget is integral for managing resources and ensuring financial success as it includes details for all operating expenses such as wages, rent, utilities, supplies, and other overhead costs, as well as projected sales revenue.
By establishing an operating budget, businesses can plan and control their financial resources, track performance, identify potential issues before they arise, and make decisions about investing in new projects, products, or ventures.
Therefore, it serves as a detailed roadmap for a company’s financial operations, planning, and stability.
Explanation
The primary purpose of an operating budget is to plan and outline the financial strategy of an entity, whether that be a business, a household, or even a government body, for a specific period (usually a fiscal year). It is an extensive projection of revenue and expenses expected to be incurred in various operations. Operating budget serves as a guiding tool that helps businesses align their goals with their financial capabilities.
It can be used for anticipating profits, understanding costs, and managing cash flows, thus allowing businesses to plan for growth and potential bottlenecks in their processes. The operating budget also acts as a monitoring instrument, allowing businesses to track their spending and revenues over time.
If actual results deviate significantly from the budgeted figures, it can prompt an investigation to identify the causes of such discrepancies. This can ultimately lead to better cost management, as it aids in identifying inefficient areas that could be improved.
By using an operating budget, businesses can ensure they have the financial resources necessary to meet their strategic objectives, making it a critical component of financial planning and analysis.
Examples of Operating Budget
A Local Government’s Operating Budget: Every fiscal year, local governments create operating budgets to manage their expenses and revenues. This budget includes funds that are allocated to different departments like Public Safety, Public Works, and Parks and Recreation. It accounts for government employee salaries, routine operating expenses such as water and electricity, and infrastructure maintenance. The revenue part of the budget often comes from property taxes, fines, license fees and intergovernmental transfers.
A Hospital’s Operating Budget: A hospital uses an operating budget to map out its foreseeable income and expenditures in a particular fiscal year. This budget includes costs for salaries of medical staff, purchase of medical equipment, maintenance of hospital infrastructure, and medical supplies. It also predicts the expected income from patient fees, insurance claims, and government subsidies.
University Operating Budget: Educational institutions like universities plan their operating budgets taking various factors into consideration. The budget includes salaries for faculty and staff, campus maintenance, student services costs, and investments for research initiatives. The sources of revenue would be tuition fees, government funding, donations and grants, and income from university-owned ventures such as bookstores or food services.
Operating Budget FAQs
What is an Operating Budget?
An operating budget is a detailed projection of all the revenues and expenses that a business expects to incur over a specific period of time. This budget is often used as a tool for performance measurement and control.
What is included in an Operating Budget?
An operating budget typically includes both revenue and expenses. Some common examples of revenue include product sales, royalties, and fees. Expenses often include salaries, rent, utilities, and depreciation.
How often is an Operating Budget updated?
Normally, most businesses update their operating budget annually. However, some may update them more frequently, such as quarterly or monthly, depending on the nature of the business and its determined needs.
What is the difference between Operating Budget and Capital Budget?
An operating budget deals with ongoing operational expenses such as salaries, utilities, and rent. On the other hand, a capital budget is used to plan for investments in long-term assets such as property, plant, and equipment.
Why is an Operating Budget important?
Operating budgets are crucial as they provide detailed insight into how a company can measure its profitability, plan for the future, and manage its costs of conducting business. They act as a financial blueprint for the future operation of a business.
Related Entrepreneurship Terms
- Fixed Costs
- Variable Costs
- Revenue Forecast
- Capital Expenditure
- Financial Forecasting
Sources for More Information
- Investopedia: It is a comprehensive and highly reliable source for finance-based information, including Operating Budget.
- AccountingTools: This website offers detailed insights into numerous finance-related concepts and terms.
- Corporate Finance Institute: CFI is a professional educational institute that offers a wealth of information on various finance topics.
- The Balance: This is another well-trusted resource for understanding finance and economy concepts including Operating Budget.
