What Is Included in an Operating Budget?
Understand the comprehensive makeup of an operating budget, covering its revenues, expenses, and distinct role in business finance.
An operating budget serves as a foundational financial plan for an organization, projecting its anticipated revenues and expenses over a defined period, typically one fiscal year. This comprehensive estimate functions as a roadmap, guiding day-to-day operations and resource allocation. It enables businesses to monitor financial performance and make informed decisions throughout the year. The budget essentially sets the stage for understanding how a company expects to generate income and manage the costs associated with its regular activities.
Core Operating Revenues
Operating revenues are income a company generates from its primary business activities, directly related to the sale of goods or services. For example, a retail store’s operating revenue comes from selling merchandise to customers. Similarly, a service-based business like an accounting firm earns operating revenue from the professional services it provides to clients.
These revenues are often referred to as sales revenue or simply revenue, and they are recorded on the income statement as the top line before any expenses are subtracted. For businesses with subscription models, recurring income from ongoing customer contracts also falls under operating revenue. It is important to distinguish operating revenue from non-operating revenue, which comes from secondary sources not central to the business’s main operations, such as interest income from investments or gains from selling assets.
The calculation of operating revenue generally involves taking gross sales and subtracting any returns or allowances. This provides a clear picture of the money earned from the regular, ongoing efforts of the business. Understanding these revenue streams is essential for forecasting and evaluating the effectiveness of a company’s operations.
Essential Operating Expenses
Operating expenses are the costs necessary to conduct a business’s day-to-day activities and generate revenue. These regularly incurred expenses are reported on a company’s income statement, and managing them is fundamental for profitability.
One significant category is the Cost of Goods Sold (COGS), which includes direct costs associated with producing goods. For manufacturers, COGS covers raw materials, direct labor, and manufacturing overhead, reflecting the expense tied to each unit.
Selling, General, and Administrative (SG&A) expenses are indirect costs crucial for running the business. Selling expenses include marketing, advertising, and sales commissions, vital for attracting customers and driving sales.
General and administrative expenses cover overhead costs supporting overall operations. This includes salaries for administrative staff, rent, utilities, and office supplies.
Other routine administrative costs include insurance premiums, professional service fees, and maintenance expenses. Depreciation is also an operating expense, representing the allocation of a tangible asset’s cost over its useful life, even though it is non-cash. These expenses, whether fixed or variable, are necessary for the business to function and are included in the operating budget.
Clarifying Operating Budget Scope
An operating budget plans for ongoing, day-to-day financial activities. It focuses on revenues and expenses tied to primary operations over a short-term period, typically a fiscal year, providing a framework for monitoring routine business costs.
This financial tool differs from other budgetary instruments, such as a capital budget. A capital budget plans for long-term investments in assets like buildings or machinery. These substantial, non-recurring expenditures are not part of the operating budget, as they are treated as investments depreciated over time rather than expensed immediately.
The operating budget also differs from a cash budget, which focuses solely on the timing of cash inflows and outflows. While an operating budget outlines projected revenues and expenses, it does not necessarily reflect the company’s immediate cash position. For instance, revenue might be recognized on credit, but cash may not be received until later.
Conversely, non-cash expenses like depreciation are included in the operating budget but do not involve actual cash outlays. The cash budget helps manage liquidity and ensures the business can meet short-term obligations by tracking cash flow. Thus, the operating budget details core activities’ financial performance, while capital budgets address long-term asset acquisition, and cash budgets manage money movement.