Definition§
An operating budget is a detailed projection of all estimated income and expenses based on forecasted revenue during a specified period, typically annually. It helps organizations manage their day-to-day operations, ensuring financial sustainability and strategic resource allocation. This budget category encompasses all operating activities of a company including sales, production, labor, and overhead expenses.
Examples§
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Retail Company:
- Revenue: Projected sales of $500,000 for the fiscal year.
- Expenses: Cost of goods sold (COGS) - $300,000, Salary expenses - $100,000, Utility expenses - $20,000, Marketing expenses - $30,000.
- Net Operating Income: $50,000.
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Manufacturing Firm:
- Revenue: Projected sales of $1,000,000 for the fiscal year.
- Expenses: Raw materials - $400,000, Labor costs - $200,000, Maintenance costs - $50,000, Administrative expenses - $100,000.
- Net Operating Income: $250,000.
Frequently Asked Questions (FAQs)§
What is the purpose of an operating budget?§
The purpose of an operating budget is to provide a roadmap for the financial activities of an organization. It helps in forecasting revenue, planning for expenses, aligning organizational activities with financial goals, and ensuring resource allocation is both efficient and effective.
How does an operating budget differ from a capital budget?§
An operating budget covers the day-to-day costs and revenues related to the core operations of a business. In contrast, a capital budget focuses on long-term investments such as purchasing equipment, building facilities, or other capital expenditures.
Who is responsible for preparing the operating budget?§
Typically, the finance department, in collaboration with departmental managers, is responsible for preparing the operating budget. This collaboration ensures that the budget accurately reflects the needs and goals of various parts of the organization.
Can an operating budget change during the fiscal year?§
Yes, an operating budget is often reviewed and adjusted periodically to reflect changes in market conditions, unexpected expenses, or shifts in business strategy.
How often should a company prepare an operating budget?§
Operating budgets are usually prepared annually. However, many companies review and update their operating budgets quarterly to ensure they remain aligned with current operational realities.
Related Terms§
- Production Budget: A subset of the operating budget which outlines the number of units that must be produced to meet sales goals while managing inventory levels.
- Cash Flow Budget: Forecasts incoming and outgoing cash flows, helping to ensure liquidity.
- Capital Budget: Concerns long-term investments and expenditures on assets such as buildings and machinery.
Online References§
Suggested Books for Further Studies§
- “Budgeting Basics and Beyond” by Jae K. Shim and Joel G. Siegel.
- “Budgeting and Financial Management for Nonprofit Organizations” by Lynne A. Weikart, Greg G. Chen, and Ed Sermier.
- “Principles of Budgeting and Financial Management” by Minister Whitehouse.
Accounting Basics: “Operating Budget” Fundamentals Quiz§
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