Both the net and gross operating budget help a company's leadership monitor sales levels and enforce the cardinal tenet of business decision-making: profit. To make revenue generation a success, senior executives work in tandem with department heads to hire and promote professionals who demonstrate an ability to sell effectively, build ties with customers and analyze periodic profits with great depth.
Gross Operating Budget
The term gross operating budget may relate to two things. It may be an outline a company draws up to project gross profit data, which encompasses gross revenues and material costs the business expects to record over a defined period of time. For example, top leadership may direct sales managers to prepare a gross operating budget for the next 12 months or two years.
A gross operating budget also may be a traditional budget -- minus all the discounts, rebates and refunds a business expects to receive on certain expenses. For example, company principals may ask that department heads prepare a gross operating budget, listing operating charges -- such as office supplies and commodity costs -- without transactional reductions or legally mandated discounts. This blueprint may help top leadership test the company's financial soundness, determining how it would fare in a worst-case scenario from an operational standpoint.
Net Operating Budget
Drawing on a gross operating budget, a net operating budget may refer either to net income an organization expects to generate over a given period of time or net expense and revenue amounts it expects to records in corporate books. Net income is an important metric that touches on corporate profitability, the perennial criterion investors check before putting their money to work and buying equity shares. Consequently, department heads and segment chiefs work to ensure that net operating budget information is accurate and complete -- not faulty data or information that personnel pull out of thin air.
Notwithstanding their differences, gross operating budget and net operating budget share some similarities. Both concepts are semantically close and lead to the same metric: operating budget income or loss. Generally speaking, operating budget discussions help a company figure out its competitive prognosis in advance -- say, a few months or quarters ahead -- and establish the operational remedies to prevent inefficiencies and make more money. Corporate leadership understands that budgeting personnel often formulate plans based on approximate data or assumptions, which may come from an admittedly spotty record of transactional data. However, senior executives still encourage budgeting initiatives because they enable the organization to determine areas where it might lose money, defective processes to fix and segments to turn around.
Personnel involved in gross operating and net operating budget discussions include accountants, budget supervisors and financial managers. Production heads and cost analysts also weigh in on these talks.
- San Francisco State University; Chapter 7: Net Present Value and Capital Budgeting; Donglin Li
- Always Frugal: Budget Worksheet
- Organisation for Economic Cooperation and Development; Performance Budgeting: A Users' Guide; March 2008
- Minnesota Office of the Legislative Auditor; Performance Budgeting; February 1994
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.