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What Is an Operating Budget?

Operating budgets allow businesses to manage recurring monthly expenses.
Credit card spending should be factored into operating budget calculations.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 November 2014
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Operating budgets are carefully crafted budgets that focus on managing current expenses. This is different from other types of budgeting strategies that may include provisions for future transactions or the creation of additional expenses that are outside the scope of the basic budget. The focus of an operating budget is to ensure there are funds to maintain the continued operation of a business, and that those funds are distributed in the most cost-efficient manner.

Just about any type of organization drafts and follows an operating budget. Companies of all sizes require this type of budgeting as a means of understanding how much income they need to receive in order to continue operating at current levels. Non-profit organizations also must function with an annual budget that reflects the anticipated amount of donations and other revenue sources that will ultimately be used to cover expenses that are essential to the function of the entity. Even households benefit from drafting a reasonable budget of this type, since the process makes it much easier to identify and settle expenses as they come due each month.

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An operating budget for a business will usually include line items for ongoing expenses that are incurred each month. This will include the salaries and wages of employees, as well as any expenses associated with health insurance and other benefits offered to the workforce. The budget will also look closely at production costs, as well as any expense that is necessary to keep the company operating and thus capable of earning a profit. In many cases, the operating budget will factor in any scheduled payments on debt that are essential to the operation, including interest payments to lenders.

The foundation for an operating budget is created by estimating the workload required to keep the business fully operational. This is normally presented as the total work units identified by the cost accounts that are relevant to the operation. By structuring the budget based on verifiable information, it is much easier to create an operating budget that does truly reflect what is needed in the way of income to keep the business functioning. Often, this information is essential to the task of allocating funds to the operation of various departments or sections within the company organization, and thus making sure each area has what it needs to manage its assigned tasks efficiently.

As with any type of budget, an operating budget may be adapted or otherwise amended from time to time. Changes may be made in response to shifts in the amount of revenue generated each month, the launch of a new product line, the opening and closing of facilities, or projected changes in consumer demand. For this reason, some degree of flexibility must be included within the overall operating budget, allowing officers and other decision makers the ability to increase or decrease budgeted line items when and as necessary.

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behaviourism
Post 2

I was given the advice by an artist several years ago that people starting their own businesses, especially in things like jewelry making or any other more artistic medium, should stick to cash flow budgets whenever possible- in other words, save what you make until you need to spend it, and don't spend what you don't have. That is the cause of so many small businesses' failures, and why many artists are "starving". This model also works well for actors and musicians just starting out.

oasis11
Post 1

I know that flexible budgeting works best in certain industries.

Industries that are affected by climate conditions such as the farming and soft drink sectors need to have flexible budgets because the weather is unpredictable and these industries are dependent upon it.

Also, industries that change frequently like fashion or those that only produce things on demand are also better off with a flexible budget.

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