Operating Budget…An Important tool for Path Creator

As the name clears all the doubt and speaks itself, it generally consist of several sub budget. Mainly sales budget, which should be prepared first. It is a detailed projection of all the future income and expenses. Sales budget should be prepared first because all the projection are based on sales. It’s a short term budget usually for one year. Analyst prepare Operating budget to estimate the future income and expenses related to a particular operating activity.

Operating Budget is an important tool to estimate the future income and expenses. it helps managers to create the base for any business for the given time mostly annually. 

The first and crucial factor of the operating budget is the sales and collections budget. This is followed by the projected cost of goods sold budget, the inventory and purchasing budget, Marketing budget, and the budget for other operating expenses.

Operating budget are generally based on quarterly projections. Challenging part of it is to learn from historical performance and match up with the probable additional cost or market variables. An analyst may prepare more than one operating budget for the same operation one for best case or another with the negative scenario.

An operating budget lists the costs of running business, including salaries, equipment, services, interest payments, and rent, utilities, loans, advertising, and travel expenses. Most businesses create an annual operating budget to predict recurring, regular expenditures, and some businesses go back and record actual expenditures in the operating budget to compare the predictions with actual costs.

	Revenue	Year-1	Year-2	Year-3
Core Service
	Service-1	85442	199325	227766
	Service-2	97188	226772	259168
	Service-3	97360	227160	259600
	Service-4	63720	148560	169800
	Service-5	131100	305820	349500
	Service-6	66000	306600	525600
Optional Service
	Service-7	57750	134730	153990
	Total	598560	1548967	1945424
Cost Model
A.      Operating exp.
Direct Labor and Benefits		391,765.00	658,098.08	749,523.12
Supplies-1		1,500.00	3,696.00	4,460.54
Supplies-2		1,500.00	3,696.00	4,460.54
Factory Waste		900.00	2,217.60	2,676.33
Maintenance/Parts		3,600.00	3,801.60	4,014.49
Supplies-3		28875	67365	76995
Cost of goods sold		428,140.00	$738,874	$842,130
B.     Administrative Expenses
Rent		78,000.00	80,340.00	82,750.20
Salary		84800	94764.8	102553.53
Utilities and phone		6,000.00	6,180.00	6,365.40
Office Expenses		6,000.00	6,180.00	6,365.40
Insurance		3,600.00	3,708.00	3,819.24
Other Operating Expenses		3,600.00	3,708.00	3,819.24
		182000.00	194,880.80	205,675.01
C.     Advertising and marketing Expenses
Advertising and marketing		50,000.00	24,000.00	24,720.00
Total Expenses (B+C)		232,000.00	218,880.80	230,395.01

Steps:-

Sales/ Revenue:-

Most of the operating budget revolve around cost and expenses but once you are done with these number they all will be compared to the total sales. These number may be for monthly, quarterly, half yearly or annually. Be attentive to all the events which can affect your numbers. For an instance, for seasonal business assume that there will similar growth rate in sales for the next year at the period of time.

Cost of Goods:-

One can use a similar prediction method to forecast what your goods will cost for future. Match with expected fluctuation in sales, as this will affect your purchasing decision.

Sales - Cost of goods sold = gross profit

Other cost:-

Depending upon your business size, you may encounter N numbers of operating cost. It may be Salary, rent, Electricity/telephone Bill, travel expenses, R&D Expenses. Use proper labeling to your expenses which will help you to facilitate analysis and predict the expenses over the course of the next year.

Gross profit - other cost = operating income

Taxes:-

When you are done with the calculation of operating Income, you can estimate your annual taxes.

Operating income – Tax = Net Income / Net losses

This is the last step of your operating budget. When you progress to next year compare your estimated budget to actual. This will tell you how your estimation worked. If you have not used your fund to the allocated areas as expected, moved that money to some other area. And if you have used some extra money to some area it means you may need to cutoff or consider layoff.

Operating Budget	Year 1	Year 2	Year 3
Revenue	598,560	1,548,967	1,945,424
Cost of goods sold	428140	738874	842130
Gross profit	85620	715328	1000738
Administrative Exp	182000	194881	205675
Marketing & advertising Exp	50000	24000	24720
	147200	124116	127839
EBITDA	(61580)	591212	872899
D & A	8,150.00	8150	8150
EBIT	(69730)	583062	864749
Interest	19188	18260	17285
EBT/ Operating Profit	(88918)	564802	847464
TAX	0	0	0
Earning after Tax/ NET Profit	(88918)	564802	847464

Operating budget can be prepared by using any of the budgeting method i.e. Zero based or traditional.it means it can be for new start-up or for existing Business. Remember, if using historical data, consider market variables to allocate future cost with historical changes.


Budgeting                                                                                                                         Capital Budget