Operating Budget

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 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.

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.

#1 Revenue

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 determined.  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
• Freight
• 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 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:

• Rent
• Head office
• Insurance
• Telecommunication
• Management salaries and benefits
• Utilities

#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:

• Interest
• Gains or Losses
• Taxes

#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 separate 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.

Video Explanation of Types of Budgets

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).

Additional Resources

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:

• Budgeting Head
• Project Budget
• Budget Holder
• Financial Modeling Guide