You have a choice about the type of budget you create for your small business. An operating budget may seem more familiar to you, because it is similar to the type of budget a household uses. An activities-based budget, on the other hand, focuses on essential tasks you want to perform. Looking at your budgeting from either of these viewpoints can change the way you set annual goals for your company.

Operating Budget Advantages

When you create an operating budget, you determine your projected sales collections, then subtract the cost of goods sold to determine what amount of profit you want to be able to claim. What remains is the amount you have to operate your business, otherwise known as your operating budget. You can see what you can afford for each department and assign individual budget amounts to those departments. This offers you the advantage of knowing what you can afford, and it sets limits on what each department can spend.

Drawbacks to Operating Budgets

When you set up an operating budget, the actual costs of running each department may not match the allocations you make. Just because you have a set amount of dollars you know you can spend, that doesn't mean those dollars should be spread out evenly to departments. You could end up shorting a department that has higher expenses, while spending too much on a department that doesn't need as much money.

Plusses of an Activity-based Budget

Your activity-based budget should be based on the essential tasks you want your company to perform. Estimate the cost of each task, including labor, materials, supplies, financing and marketing. This will result in an amount that you need to put into each department or project team. The sum total of all of your tasks should be less than your revenues, so that you have room for profit. This offers you the advantage of putting your money where it is most needed. You improve the chances of success for each business activity, because it is fully funded.

Activity-Based Budgeting Pitfalls

One of the problems you may encounter with activity-based budgeting is that you simply don't have the funds to put into all of your ventures, causing you to eliminate or postpone some activities. Your other choice is to borrow money to fund projects. This can be risky. You have to evaluate each activity to determine the likelihood of its success before you take out loans. You can easily find your company overextended on loans if it borrows for separate projects without someone tracking the amount of overall debt you are taking on.