Updated: Jan 7, 2022
Running a business can be intense, especially as this involves a lot of operations, including purchases, sales, orders, invoicing, customer fulfillment, etc. You can streamline this process by creating an operating plan and budget for your business. This gives you a clearer picture of what is happening around your business and how business expenses meld to help you achieve your profit goals. As you understand your operating costs you'll also want to maximize your credit history to offset expenses. But first, what is an operating budget?
Let's Define The Operating Budget
An operating budget is a plan that shows how much you expect to spend for business expenses and how much revenue your business produces from the day-to-day operations. Operating budgets are created at the end of the year for a specified period, usually one year. However, you can categorize your annual operating budget into monthly or quarterly periods. Below, you'll learn how to create a comprehensive operating budget (that makes you money):
How To Create A Comprehensive Operating Budget For Your Business (That Makes You Money)
Identify Potential Orders From Your Consumers
If your business is product-based, you can estimate the number of future sales for a specified period. Obtain this estimate from past orders or gather market research that shows expected marketing impacts. This assessment helps you plan towards production costs or purchase orders from vendors and suppliers. It also determines how much you need to spend on labor or materials to produce or carry out a service for your consumers.
Calculate How Much Revenue Your Business Will Make
After you have an idea of how many orders you expect to receive from your pipeline, you can estimate how much you can make as revenue based on the sales price of your products or services. For example, if you already have ten orders for a product that costs $100 each, this estimated amount will be $1000.
Write Your Business Costs And Group Them
Business expenses creep up from various sources, and as the famous saying goes, "You have to spend money to make money." This is one of the reasons why business funding is an essential aspect of every business. When you run a business, you will always incur expenses. Operating costs include office rentals, utility bills, logistic fees, office materials, internet costs, staff costs, etc. When you identify every possible cost for running your business, you can group them into similar classifications.
Your business expenditures can either be variable or fixed. The fixed business costs are expenses that won't vary based on the sales level in a specific period. Whether you sell products or provide services, these expenses still have to be paid. Examples of fixed costs that your business can have include rent, insurance, or fixed salaries. On the other hand, variable expenses change periodically and vary based on the sales period.
Fixed business costs are easier to estimate but are harder to control; no matter your level of operations, you will accrue expenses. If you want to reduce certain variable costs, you can reduce the activity that drives that particular cost.
Determine Your Profit Margins And Net Income
The goal of every business is to make a profit. It's not enough that your company earns revenue. Your revenue should exceed the business expenses if you want to remain profitable. An operating budget provides a means for you to visually gauge your business profit for a given period. There are different types of profit margins, but the three standard business margins to be aware of are the gross margin, operating margin, and net margin.
The gross margin is the excess of your business revenue over the cost of goods or services. It shows how much of your earnings can cover the actual cost of producing a product or providing a service. You have the business operating budget when deducting other general and administrative expenses from your gross margin budget. After applying an estimated tax rate to your operating budget, you will have the net income margin.
Review Actual Results And Compare Them With Your Operating Budget
For the most part, your operating budget is built based on estimations. Therefore, review the existing business results compared to what you had forecasted in your previous operating plan. This will help with future business and financial planning.
For instance, if you estimated a $100,000 revenue for a particular month in your operating budget, and the actual results were $80,000, conduct a review to determine what caused the revenue to fall short. Your findings may show that you didn't sell as many products as you expected or sold the estimated products at a lower price than what you included in your budget.
3 Benefits of an Operating Budget
1. Business and Financial Planning
View an operating budget as a blueprint for your business. It helps you plan adequately for business operations. You can estimate how profitable your business can become with an operating budget.
2. Strategic Decision Making
Ultimately, you can make better strategic decisions for your business through the information in an operating budget. When you complete an operating plan for your business, it gives you a more transparent representation of the costs needed to run your business. An operating budget clarifies the required funding needed to support operational activities. You can make strategic decisions regarding financing, capital investments, and resource allocation.
3. Cost Saving Opportunities
An outline of your business expenses will help you identify which areas absorb most of your business costs. Generally, expenses for personnel, occupancy, logistics, and marketing can be significant. While these expenses may be necessary to operate your business, you might find cost-saving opportunities when reviewing your operating budget plan.
An operating budget is an essential financial tool that can help you plan your business operations better and make sounder decisions that make you money. You can build one by itemizing estimates for sales, variable and fixed expenses, capital costs, and deriving the expected business profits for the period.