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An operating budget consists of all revenues and expenses over a period of time (typically a quarter or a year) that a corporation, government (see the U.S. 2017 Budget), or organization uses to plan its operations. An operating budget is prepared in advance of a reporting period as a goal or plan that the business expects to achieve. Below is an example of a downloadable budget template and an explanation of how to prepare one.
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Components of an Operating Budget
The main components of an operations budget are outlined below. Each business is unique and every industry has its nuances, but these items are general enough to apply to most industries.
Revenue is usually broken down into its drivers and components. It’s possible to forecast revenue on a year-over-year basis, but usually, more detail is required by breaking revenue down into its underlying components.
After variable costs are deducted, fixed costs are usually next. These expenses typically do not vary with changes in revenue and are mostly constant, at least within the time frame of the operating budget.
Examples of fixed costs include:
Management salaries and benefits
#4 Non-cash expenses
An operating budget often includes non-cash expenses, such as depreciation and amortization. Even though these expenses don’t impact cash flow (other than taxes), they will impact financial reporting performance (i.e the figures a company reports at the end of the year on their income statement).
#5 Non-operating expenses
Non-operating expenses are those that fall below Earnings Before Interest and Taxes (EBIT) or Operating Income. Examples of expenses that may be included in a budget are:
Below is a short video that explains the various types of budgets, what they’re used for, and why they matter to corporations. You’ll quickly learn the differences between the three main types of budgets (operating, capital, and cash).
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
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