Operating Budget Definition Example How To Prepare

Operating Budget Definition

Types of Operating Budget

There are mainly three types which are as follows:

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Revenue Budgets: These are those budgets that forecast the expected revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more from the business over a set period.Expenses Budgets: Budgets that forecast the expenses which are to be incurred over that set period are expenses budgets.Profit Budget: It is a difference between the above two budgets, i.e., when we subtract the revenue budget from the expenses budget, we get a profit budget.

Example of Operating Budget

Suppose ABC Inc. wants to prepare its operating budget based upon the actual data of the business in the past two years given below:

Now, from the above-given data, the budget for the year 2020 is as follows:

How to Prepare Operating Budget?

The steps to prepare this budget are as follows:

Gather the actual data for at least the past two years.Observe the trend of increase or decrease in revenue or expenses of the business.Check trends of the industry in which the entity operates, i.e., industry norms and new government policies which have a significant impact on the activities of the business.Observing the above parameters, analyzing the market, and observing the prospective customers and market cap would help us analyze the percentage increase in revenue and expenses accordingly.Accordingly, prepare the operating budget by taking an expected increase or decrease in figures from the previous year’s actual figures. After that, it calculates the expected profits.

Importance

It gives a route map to the business how much we have to spend on which portion of expenses by keeping continuous track of the following areas:

Operating Budget v/s Financial Budget

The operating budget considers those figures, which are only for a particular segment, but, on the other hand, the financial budget considers all aspects of the business, which may result in financial terms.A financial budget is a broader term as it considers business as a whole compared to a particular segment we look after while preparing an operating budget.

Benefits

The owner of the business or the analyst need not go in-depth as he could observe the position of the business by comparing actual budgets to get the results.A track and monitoring of the expenses incurred help avoid unnecessary wastage of resources and funds.Increases or improves the team’s efficiency by giving them a deadline for expenditure and revenue as well as fixed budgets.

Drawbacks

It is based on predictions and expectations that could be judged accurately as there are thousands of other factors in the environment in which an entity operates, such as regulatory policies, etc. For instance, let us say we are in the manufacturing business and manufacture plastic bags, and the government, by its notification, banned the use of plastic bags. Then, in this case, all our preparations and funds will get wasted.It requires time as continuous follow-up and improvements are required.

Conclusion

The operating budget is mainly connected with the estimations of all revenues and costs that the entity will incur over a set time to achieve the objective of the business. However, sometimes it is also prepared to pre-estimate the revenues we will earn after the period is over and plan further activities accordingly as each business activity is inter-connected.