How do I Develop an Operating Budget?

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  • Written By: D. Nelson
  • Edited By: M. C. Hughes
  • Last Modified Date: 30 May 2020
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An operating budget is a projection of the amount of income and expenses that will be included in business operations. A typical operating budget normally includes important financial details for about one year of operations. This kind of budget is usually developed by business owners, managers, sales executives, and financial analysts who have need to plan for the immediate future, so long-term expenses relating to factors such as stock and share value are normally left out. In order to develop an operating budget, it is first necessary to develop a sales budget, followed by considerations of labor and other expenses that may affect short-term financial planning.

Most experts believe that an operation budget should begin with a sales budget. This is a projection of sales. In this kind of budget, you should consider factors such as the current market, the size of your customer base, and level of production or inventory. The amount of money you spend on other operational aspects is often determined by how much you project you can sell and what the profit margin can realistically be.

Once a sales budget is developed, you should have a better idea about how other components of the operating budget should look. Decisions regarding labor often comprise the next steps. In developing this stage of the budget, consider the number of people you need in a staff to handle the projected workload. Likewise, you should also think about how much you can pay the labor, a factor determined by cash flow and difficulty or level of specialization of the work.

An operating budget should also project expenses. For different businesses, this is going to mean different things. Common among many businesses are expenses for upkeep and servicing of locations. Issues such as electricity and heat or air conditioning are commonly factored into budgets. Some businesses that outsource work must consider the fees, efficiency, and speed of production of these third party businesses.

Many financial experts endorse a simple formula for developing an effective operating budget. They believe that an individual with this task should begin with a clear idea of what the starting budget is by considering accounts receivable, inventory, and actual cash. Added to this starting budget should be whichever funds or fixed short-term assets can be expected within the fiscal year that the budget is being developed for. Once a sum is determined, the individual developing the operating budget should subtract all projected expenses. The number left is the end balance that the company can plan on working with.


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