Have you ever heard of the operating budget? Know what it is? It is a very important document for administrators, directors and / or managers. With it they can know what is the profitability and viability of a business.
But, the operating budget is much more. Therefore, today we are going to focus on this term so that you can know everything about it.
What is the operating budget
We can define the operating budget as a document where the income, as well as the expenses, of a company should appear, in an ordinary way. That is to say, in it a list will be made of the income that is had with respect to the sale of products and services while, on the other hand, the expenses will be recorded in the production costs.
In this way, the company can plan what its operations will be in a certain period of time, because this budget is not perpetual but is normally carried out on a quarterly or annual basis.
One of the best known operating budgets is the one that shows what are the labor and material expenses compared to the sales that can be made in that period of time.
Now, surely you have reached a conclusion that makes you doubt the effectiveness of the operating budget. And it is that, although the expenses that are going to have in the future, as well as the income, really we don't know if that future will behave that way; in other words, we are making an estimate of what income and expenses are thought to be at any given time. But for sure you do not know if the values you have given will be exact or will vary upwards or downwards.
Advantages and disadvantages of doing it
Based on the above that we have seen, many may consider that the budget is really based on a subjectivity, which may not be consistent with reality, nor anticipate possible changes (especially if it is an annual operating budget). But the truth is that it does have some advantages that make many companies carry them out. These are:
- Have more control over income and expenses. When "pricing" both elements, it is taken into account not to exceed that limit that has been set in the budget, and if doing so it will always be taken into account for future items. With this, it is possible to cut the cost a little more and increase the income by relying on other departments.
- It allows studying the evolution of products or expenses. Thanks to the forecasts that are made, studying afterwards what has happened with the previous budgets allows us to anticipate problems or to achieve a better balance of the data.
- Short-term goals can be set, especially in the case of sales and the adjustment of expenses, in such a way that it could be reformulated in short periods of time to adapt to trends or consumer demand. Of course, you have to be realistic, since, otherwise, you would be more at a disadvantage than an advantage.
Despite everything, the fact that this subjectivity exists is still present. If we also add the fact that any of the factors is not controlled, it can make the company's situation in the market change completely, for better or for worse.
How to make an operating budget
When preparing an operating budget, certain resources must be taken into account that will help the company to make it as "realistic" as possible, within what is possible.
Thus, it must have information based on:
- The past trends in sales. That is, how were the sales in past periods, not only immediately internal, but in past periods equal to the budget you want to prepare.
- Past trends in spending. To also know how the company worked in the same period but in the past, and to know if there were large variations with respect to the previous budget (if it was drawn up).
- Changes that have occurred. In the laws, in regulations ... that may have an impact, either on expenses or on the income of that company.
- The trend of the economy, both past, present and future. Since many times if you are insightful, you can anticipate certain clues that will tell you where to direct the company.
- The trend of society. Do not forget that customers is the ultimate goal, especially for income. And if it is possible to reach millions of them, income and sales will be guaranteed. For this reason, it is necessary to try to know what the needs or the fashion products are in order to exploit them, either directly or indirectly.
Once you have all that data, you can start developing an income budget. This is the first step because, based on the forecast of income and sales that are going to be made, the expenses that there will be to satisfy that demand for products can be determined.
After the income budget comes the expense budget. It can include fixed costs such as the rent of the building, payment of workers, office expenses, etc.
Once both budgets have been put together, an operational result can be offered, which will consist of knowing how much money the company is going to earn. Or how much you will lose if you are going to make that bet, although in these cases the income and expenses budget is redone so that the final figure is positive.
In short, we can say that the formula that the operating budget offers us would be based on the following:
Operating result = Sales - fixed costs - variable costs - accounting costs
The latter would be those that come from impairments or book amortizations.
As you can see, the operating budget is a very useful tool for companies. This puts in value both the income and the expenses that are going to be had in a period of time. And, in this way, you can monitor business viability. Although, of course, you cannot lose sight of other indicators that will help you to know the good progress, or not, of the business.