Steps in Preparing an Operating Budget

by Nolan Kido; Updated September 26, 2017
There are multiple steps in preparing an operating budget.

An operating budget is a detailed forecast of business activity for a short-term, future period. Operating budgets have a different perspective than capital budgets, which are used to plan for distant, long-term projects. Owners generally use an operating budget to plan one year of revenue and expenses for their businesses. There are specific steps in preparing an operating budget.

Prepare a sales budget. A sales budget is a sub-section of an operating budget and deals exclusively with a company's revenue-generating activities. For example, a service company's sales budget will indicate the number of projected sales, the projected price and the project cash collections from those sales. The sales budget will result in both an estimate of total sales in dollars during the year and an estimate of cash collections for the year.

Prepare a cost budget. A cost budget is a projection of all expenses the business will incur during the forthcoming period. Generally a cost budget is split into two sections: the cost of producing revenue and fixed costs. For manufacturing companies, the cost of producing revenues is the cost of goods sold. For service companies, the cost of producing revenues is the cost of sales.

Prepare the operating budget. Start with the projected revenue from the sales budget. Subtract the cost of producing revenue from the cost budget. This sum equals the gross profit. Next, subtract fixed costs. Then, subtract financial costs such as interest and depreciation. The final sum is projected income.

Tips

  • Preparing an operating budget is a useful way for business owners to capitalize market opportunities and monitor threats. Businesses with high projected income may want to investigate expansion, while businesses with high projected losses may need to shed costs.

About the Author

Based in Boston, Nolan Kido has been writing professionally since 2006. He holds a master's degree in accounting and worked in the real estate and banking industries prior to his current career. Kido has contributed to three personal finance books and specializes in writing about taxes and investments.

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