An operating budget is a summary of the projected financial operations of an organization or entity. These include expenses and revenues, capital expenditures, and cash flow. The budget details how a business uses its money, where it gets the money from, and how much it expects to spend. The latter is the most crucial part because it determines whether the organization will be able to stay financially solvent or not.
Operating budget templates are prepared to forecast forming expenses or actual expenses needed by and in an organization to stay afloat and function efficiently. This involves documenting every expense that money can be spent on, whether salaries, materials, or services.
Since it is a projection or forecast, it helps the organization set its financial priorities for the upcoming reporting period and provides a means to measure its progress toward achieving these goals. This way, the business owners and managers can understand the financial status of their organization. This article will discuss the importance of an operating budget template and its components.
How is it Used?
An operating budget is used as a planning tool for a business’s future financial direction and sustenance. It also helps organizations allocate their funds according to their priorities. It compares the actual costs with the projected costs as a financial management tool. This is called variance analysis. This is used to determine if the revenues/expenses are in line with the projection and if there are differences between them.
Suppose actual costs and revenues are higher than anticipated expenses or lower than anticipated revenues. This could mean that the organization needs to formulate a new budget for the following period with different measures and targets to achieve better financial sustainability. This also includes cutting back on various expenditures or increasing revenue sources to bring it back in line with their projections.
An operating budget template is a simple and cost-effective way to organize and manage expenses and revenues of a company or organization by month, quarterly or yearly. This helps better prepare for the future and identify opportunities for maximizing profits. It is also helpful in that it helps in forecasting expenses and revenues a business needs each year to create an operating strategy and ensure a sustainable future.
Through a budget template, the business owners and managers can understand the financial status of their organization and make better decisions. In addition, they can track their finances which is essential in staying out of debt. This will also help maintain a strong, stable, and successful business. Finally, by highlighting how every dollar made is expected to be used, operating budgets facilitate financial accountability within the organization.
Pre Consideration for Creating It
An operating budget is a projection of expenses and revenues. Thus, it requires extensive research and analysis to develop well-informed and accurate estimates or figures. Executives and managers will typically jointly prepare the budget. It begins with projecting the revenue for the upcoming reporting period.
This involves analyzing historical financial data and market variables to create a trajectory of sales, which essentially translates to revenue. Historical data includes previous budgets, bank statements, balance sheets, income statements, etc. Market variables include competition, new production lines, seasonal changes, market share, and new bills and regulations/laws that could affect the target audience and other macro factors.
Once revenue has been projected, expenses can be estimated by analyzing historical data from previous periods and market variables such as price changes of materials, fuel costs, etc. Next, each department head/manager should present their departmental accounts’ projection which the CFO and other executives then compile.
Components of Operating Budget
A template ought to reflect the financial requirements of the organization. It is therefore essential to comprehend the different components that go into it.
The essential components of an operating budget template include:
The first component of the budget is revenue. This refers to all the company’s income in the period covered by the budget. The revenue component of the budget includes sales, interest, and any other income earned by a business during a given period. This component is often broken down into gross revenues obtained from goods sold or services rendered and sales returns, which are then grossed up to identify the actual value of products for resale.
Net revenues are obtained after deducting the cost of goods sold (COGS) from gross revenues. COGS include the cost of raw materials, direct labor, and any expenses related to producing goods for resale. Revenue is projected on a year-over-year basis. The revenue drivers are volume, which includes units, customers, product lines., contracts, etc., and price, which includes per unit price, average price, segment price, etc.
2. Overhead budget
This component of the operating budget template is one of the most important in calculating the actual costs of an organization. This detailed budget item represents all direct and indirect expenses incurred to conduct business operations. Overhead budget can be categorized into:
2.1. Variable costs
Variable costs fluctuate contingent on the number of units produced or the volume of transactions performed. Examples include supplies/raw materials, wages of cost of goods sold (COGS), direct labor, direct selling costs, sales commissions, utilities, certain marketing costs, payment processing fees, maintenance, freight, and repairs. This may often necessitate the creation of a direct materials budget that highlights how many units are to be produced and the type and quantity of each raw material needed. A direct labor budget should then be created to incorporate the hours of direct labor needed and associated costs.
Direct labor costs can be calculated as follows:
- Total direct labor hours = units to be produced x direct labor hours
- Cost of direct labor = total direct labor hours x cost per hour
2.2. Fixed costs
These are generally unavoidable fixed cost items that are assumed to be incurred in any given period regardless of how much is produced, how many units are being sold, or what other businesses they may be purchasing products from. They include rent, head office, telecommunication, insurance, management salaries, and benefits.
3. Non-cash expenses
The operating budget template should include a non-cash expense item shown in the form of a variable head. It is vital to note that these expenses are not deducted from an organization’s cash flow. Examples include depreciation, amortization, stock-based compensation, and tax/withholding.
How is depreciation a cost? Depreciation is a cost associated with using assets (machinery, equipment, land, and buildings) over their useful life. It is a gradual reduction in the value of an asset over time to improve its efficiency and productivity. Depreciation characterizes the decrease in the value of assets over time due to wearing out or breaking down an asset.
4. Non-operating expenses
This category of costs is simply expenses that do not directly impact producing inventory or sales. Examples are R&D, advertising, interest expense, cost of currency exchange, gains and losses on disposition of assets, advertising, taxes, and promotions.
5. General and administrative costs
This component of a template is all expenses that do not directly relate to producing goods or providing services. Examples include rent, insurance, travel and entertainment, employee benefits, and all other expenses that are not directly related to any specific business activity but rather administrative purposes. Therefore, they can be classified as fixed or variable for better analysis.
6. Capital costs
While not typically included in the template, capital costs are essential to business operations. Capital expenditures are used to finance large or significant equipment (such as machinery) or property that may not be bought regularly but is essential for the business to run efficiently. The item purchased with these funds must have a life span more significant than one year. Examples include land purchase, plant acquisition, materials and supplies, and equipment purchases such as computers.
Below is an example of an operating budget:
|Actual amount – 2018 ($)
|Actual amount – 2019 ($)
|Operating budget – 2020 ($)
|Total Revenue (a)
|Total Expenses (b)
|Net Profits (a-b)
Once an organization has developed a working budget, it can be used to analyze business operations, take corrective measures and make better decisions. In addition, the budget can be used to identify expenditures that are not essential for the existence of the company, as well as areas that could benefit from cutting down costs.
Operating Budget Templates
An organization can reduce costs, save time, and enhance performance by using a template instead of manually creating a total budget. A template can create a budget for an entire organization or different departments or business units. The readers can obtain such templates from this site at no charge. In addition, the operating budget template can be customized to fit the business needs of an individual company.
The operating budget template is a good starting point for accurately analyzing an organization’s financial situation. The budget template should be used to support the management of an organization and provide them with data showing where money is coming from and how it will be spent. Unfortunately, there is plenty of room for error when creating a budget for any company. Numerous mistakes can thus be made, resulting in inaccurate and misleading data, with severe consequences for the business if not carefully reviewed. Therefore, the template must be used as a guide for projecting revenues and expenses and not as an overly restrictive guideline.