written by: Alice Rovney•edited by: Jean Scheid•updated: 10/29/2010
Operating budgets come in a variety of shapes and sizes. Examples of operating budgets include anything from the very detailed and complex to the simple and summarized. The trick to using the right operating budget is understanding what your needs are.
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Detailed Operating Budgets
Detailed examples of operating budgets tend to be very complex. They start out with a complete list of every revenue item (different products that you sell or services that you provide) and then progress to listing out, in detail, every monthly expense. These expenses are categorized to items such as utilities, telephone, office supplies and so on. At the end of the budget process a summary is prepared that shows projected revenue and expenses for the entire year and looks very similar to a profit and loss statement. Only, in the case of the operating budget, revenues are forecasted sales and expenses are expectations in spending.
This type of budget is most accurate because it forces you to think about sales trends and how they may be affected by current market conditions followed by listing every business expense that you have. By the time you complete the work involved with creating the budget, you're left with a very comprehensive understanding of your sales trends and your spending habits. You can then use this understanding to set sales goals and cut costs if necessary.
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Budget / Actual Operating Budgets
Many operating budgets will include a column where owners and managers can insert actual costs. This allows you to compare your budget with actual sales figures and actual expenses. Each actual cost is subtracted from its corresponding budget item to provide a variance. This is simple. It tells you information such as:
Whether you met, exceeded or fell short of your sales goals
Whether you met, exceeded or over spent on expenses
Whether you incurred expenses you did not plan for
You can then use this information to help you plan better for future periods by fine tuning your budget and making other important business decisions. For example, when sales revenues fall short, it's a good idea to review your advertising budget. Are you allocating enough funds toward advertising? Is the advertising you are purchasing working for you?
Further, when expenses exceed your budget, it's a good idea to ask yourself why. Are the lights turned off at night? Are computers shut down at the end of the day? Is the air conditioner or heat running excessively?
Of course, without the benefit of an operating/actual budget you'll never be able to evaluate your business in this important way.
They are then end result of a detailed operating budget.
Some businesses are small enough that they only need to put together a simple operating budget in summary format.
So what is a summary operating budget? It really boils down to a simple breakdown of sales and expenses. A summary budget typically estimates sales and expenses annually instead of monthly. However, if you arrive at the summary budget as the result of a detailed budget, you'll have monthly and quarterly information available. Summary budgets are great for putting together a quick plan of sales and expenses, especially if your business is very small. Otherwise, you really should start with a detail operating budget and arrive at the summary budget toward the end of the process.
One advantage to a summary budget is that you can take the current year's budget and project it over the next three to five years.
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Personal Operating Expenses
Ever thought about putting together a personal budget. So many of us are over extended these days that it would be nice to understand how to evaluate our spending habits. By applying the techniques listed above, you can take your expected revenues (draws from your business, paychecks, royalty payments, etc.), and your current expenses to come up with an idea of your current financial status. You can then take that information and create a personal operating budget for yourself. You might include categories such as entertainment, groceries, utilities, education, fuel, and so on. There is a lot to be said for balancing your personal finances and Summer Banks does a great job of summarizing finances in her article What is a Balanced Household?
Stop! Were you about to start the new year without an operating budget for your business? If you don't know what an operating budget is or just need to brush up on your budgeting skills in general, then this series is for you. Learn about the purpose and basic concepts behind operating budgets.