What is an operating budget?
An operating budget consists of all revenues and expenses over a period of time (typically a quarter or a year) which a company, government, or organization uses to plan its operations. An operating budget is prepared in advance of a reporting period as a goal or plan the business expects to achieve. Below is an example of a downloadable budget template and an explanation of how to prepare one.
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.
Revenue drivers typically include:
- Volume (units, contracts, customers, products, etc.)
- Price (average price, per unit price, segment price, etc.)
#2 Variable costs
After revenue, variable costs are typically deduced. These costs are called “variable” because they depend on revenue, and are often calculated as a percentage of sales.
Variable costs often include:
- Cost of goods sold
- Direct selling costs
- Sales commissions
- Payment processing fees
- Certain aspects of marketing
- Direct labor
Read more about variable and fixed costs.
#3 Fixed costs
After variable costs are deducted, fixed costs are usually next. These expenses do not vary as much with changes in revenue and are mostly constant, at least within the time frame of the operating budget.
Examples of fixed costs include:
- Head office
- 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
#6 Capital costs in an operating budget
Capital costs are usually excluded from an operating budget. The term operating refers to a statement of operations (income statement) which does not include capital expenditures.
Most companies prepare a seperate budget for capital investments.
Budgeting and forecasting course
To learn more about the budgeting and forecasting process at companies, check out CFI’s budgeting course! In the class, you will learn about the types of budgets (incremental, zero-based, value proposition, activity-based, etc.), the pros and cons of each, and how to implement them.
Additional learning objectives include understanding financial management best practices, learning how to design a budgeting process, and explaining how the budgeting process fits into a company’s strategic framework.
Download the free operating budget template
The best way to learn is by doing! To start working with an example on your own, download the completed operating budget template in Excel and change it to your own numbers.
The template is designed so it’s easy to edit. All hardcoded numbers are in blue, and all formulas are in black. Be sure to edit only the blue cells with your own numbers, unless you want to intentionally change the formulas.
Enter your name and email in the form below and download the free template now!
Thank you for reading this guide to operating budgets. CFI’s mission is to help you become a world-class financial analyst. With that goal in mind, these additional resources will help you on your way: