Making a budget of company is daunting. Yet, it’s one of the most important points of reference while building your business strategy. Without a detailed and realistic budget, you’re spending in the dark, and the price for that blind spending can be as bad as a negative profit margin. Let's dig deeper.
What is an operating budget?
It’s basically your company’s earnings and expenses, projected over some time through a spreadsheet or budgeting software. Every company have a capital and operating budget. Capital funds cannot be used for personnel costs and annual operating costs. Operational budgets are usually formulated for the upcoming year based on the company’s previous sales and spending patterns. It is considered good practice to update your budget monthly or quarterly, ensuring it considers the real-life situation rather than your idealistic hopes for your company's bright future. The example of operating budget is sales, administration, etc.
What are the components of the operating budget?
In a nutshell, an operating expense budget lets you make sure your costs do not exceed your revenue. The more detailed the total operating budget, the clearer the picture. By the way, you can find an operating budget template in a snap.
Here are the three most common components almost all companies include in their operation budgets:
This is where you predict the volume of products or services you’re going to sell each month. Estimating revenue and expense budget are always more accurate based on your previous year’s performance, but don’t feel too restricted by what you’ve done before. Factors like changes in marketing strategy, new product or service launches, and a changed macroeconomic situation should also be considered when you’re projecting your income for the upcoming period.
They vary with sales volume and are subject to such factors as seasonality. (You don’t pay Santa Claus all year round.) Variable costs include making your product or delivering your service (with the cost of labor required along the way), sales commissions, freight costs, and credit card fees.
Your fixed operational costs are monthly expenses, sales, or no sales. That is to say, even at idle times, you still have to pay for the office you rent, the electricity your computers consume, and the subscription services you use to cloud-store your data. Your full-time employees' salaries fall into the fixed cost category if they don’t change according to performance.
How to make better predictions for a more realistic operating budget
Now that you understand what is in an operating budget, it’s time for a caveat: there’s nothing more useless than an inaccurate budget based on guesstimates and sessions with a business astrologer. (Yes, it’s a thing.)
To make your cost and revenue estimations as precise as possible, take into consideration the following tips for operational budgeting process:
1. Study your past years’ performance.
While managing a budget in business, it’s always best to project your revenue and spending based on what you’ve already spent and earned. The first step in creating a budget is to figure out how much money you have coming in each month. There is no such thing as an average for corporate monthly spending, even within a single industry. The only time you shouldn't look back on your previous experience is when you don't have anything to look back on, which is when you're a startup. But even in this case, you can learn from public companies like yours that they are kind enough to publish their financials online more often than not.
2. Consider the macro and micro trends likely to impact your industry.
The first thing that comes to mind when discussing possible budget recalculations for the upcoming periods is inflation.
However, plenty of less obvious trends and statistics can help you get the full picture of what’s awaiting you in the coming year.
To make things a bit easier for you, we have compiled a list of 15 useful e-commerce statistics that can help you forecast how your sales patterns may be affected by social and economic trends in 2023.
3. Break your budget down.
There’s no more obvious way to get accurate estimates of what a specific department will spend than to ask the people involved. The bottom-up budgeting method stands for making a budget based on data, put together by employees at lower levels and then approved at the top. So far, this budgeting method has higher accuracy rates than the more traditional, top-down method.
4. Predict the unpredictable.
However hard you try, 100% accurate budgets simply do not exist. Yet it’s better to overestimate your spend and underestimate your sales than vice versa. One way to tackle unexpected expenses is adding a 10% safety cushion to your yearly spending estimate each month.
5. Schedule reviews and revisions.
Your budget is ready when you’ve calculated your projected revenue, made a list of all your possible operating costs and factored in seasonality, inflation, and socio-economic trends. However, things change, and it’s extremely important to adjust your budget to the changing economic conditions to ensure it doesn’t get outdated before it’s outdated.
6. Track your business’ spending.
The worst enemies of operational budgeting are a lack of transparency and insufficient data about your company's spending. Lost receipts, expense fraud, and unexpected credit card fees are all bad things that happen to people who don’t have a good habit of tracking their expenses properly.
A smart expense-control tool will keep you safe from such trouble while also making budgeting a breeze by providing accurate and neatly organized data.
Why budgeting is easier with Karta
When predicting your sales and expenses, absolute transparency is the way to go. Karta is a convenient tool that allows you to store, track, and control your company’s spend in real time.
• Your spending data is updated in real-time, so you can always see the real picture and recalculate your budget accordingly.
• Karta’s interface was designed for extra-convenient expense data storage — accounting reports are much easier to fill out when your data's in order.
• All expenses are pre-approved, which takes a ton of workload off your financial department’s shoulders.
• Karta’s Budgets is a smart space for bottom-up budgeting. Just create an empty budget for each department, assign the people in charge, and let them do their estimates. You, in turn, will be able to monitor all that’s going on inside one app.
Why is an operating budget important for a business?
An operating budget provides valuable information that protects your business from spending beyond its means. It also helps you find ways to maximize your profit and minimize your waste.
How to create an operating budget?
Make a table of your projected sales and predicted operating costs (fixed and variable) — that will be your operating budget. The article above provides you with useful tips on how to make your predictions more accurate.
What are the components of the operating budget?
The operating budgets of a company include fixed and variable costs, revenue, and other expenses.
Is the operating budget the same as expenses?
An operating budget is not solely expenses; it is rather expenses against revenue, a comprehensive tool that allows you to see if your spending plan for the next period is smart enough to keep your company running.