Organizational Wellness

Your Comprehensive Guide to Build Effective Operating Budgets

Jun 17, 2024
Last Updated Jun 21, 2024

Imagine trying to hit a target blindfolded — that's what running a business without an operating budget is like. An operating budget gives you clear financial targets and a roadmap to achieve them. It forecasts income and expenses, providing insight into potential profits and helping you set realistic goals.

But an operating budget does more than just outline your financial future. It serves as a vital tool for tracking performance and identifying discrepancies between your projections and actual results. These insights reveal operational inefficiencies and unexpected financial challenges, enabling you to make informed adjustments.

This guide breaks down key components of an operating budget, explores its benefits, and walks you through a step-by-step process to create one. Get ready to take control of your business finances and steer towards success!

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What Is an Operating Budget?

An operating budget outlines anticipated revenues and expenses over a specific period. By forecasting both income and costs, you can gain insight into potential profits and set realistic targets moving forward. 

Operating budgets can be used for more than basic planning. They also help monitor performance by tracking actual results against the projected figures. Differences between the budgeted and concrete numbers can signal operational inefficiencies or unexpected financial challenges.

For example, a retail business preparing its budget for the upcoming fiscal year would include: 

  • Sales projections based on historical data
  • Estimated costs of goods sold
  • Operating expenses such as rent and utilities
  • Marketing expenditures

This comprehensive financial plan informs business decisions for greater financial stability and growth.

Operating Budget vs. Capital Budget

An operating budget primarily focuses on a company's day-to-day operational expenses and revenues for a specific time frame. It includes costs related to regular business activities such as wages, utilities, raw materials, and marketing. The primary goal of an operating budget is to guide short-term financial decision-making so that the business runs smoothly. 

In contrast, a capital budget is concerned with long-term investments in assets that significantly impact operations. These assets may include property, equipment, technology upgrades, or other large-scale projects. Unlike the operating budget, which focuses on day-to-day activities, the capital budget addresses strategic, high-value decisions that can shape the company's future.

Key Components of an Effective Operating Budget 

A useful operating budget outlines anticipated income and expenditures to guide resource allocation. It enables businesses to forecast financial outcomes based on various scenarios, breaking down all aspects of the budget. Each of these components plays an important role in the budget's structure and utility. 

Revenue

Revenue represents the income that a business anticipates from its primary operations, such as sales of goods or services. It is a key driver of the budget, influencing various financial decisions. Accurate revenue projections can help you set financial goals and effectively plan operational activities.

Variable Costs

These are costs that fluctuate with the level of business activity. Examples include raw materials and sales commissions. Variable costs are directly tied to production or sales volume, so understanding them can help businesses manage profitability in response to changes in demand. 

Fixed Costs

Fixed costs remain constant regardless of production or sales, including rent and employee salaries. They provide a baseline for the business’s minimum financial commitment, so managing them efficiently can help maintain fiscal stability. 

Non-Cash Expenses

Non-cash expenses, like depreciation, represent costs without actual cash outflow. They typically reflect the wear and tear of long-term assets over time. Although non-cash expenses don’t involve immediate cash expenditure, they can impact profitability and tax liability. This makes accounting for these expenses vital for accurate financial reporting. 

Non-Operating Expenses

These are costs unrelated to core business activities, such as interest payments on loans. While not directly tied to day-to-day operations, these expenses still affect a company’s overall financial health. Managing non-operating expenses can help you assess the true profitability of your business.

How to Create an Operating Budget (Step-by-Step) 

A well-constructed budget provides a roadmap for achieving your financial goals. Here’s how to plot your course!

Step 1: Assess the Economic Landscape

Before diving into budget specifics, it is important to assess the economic landscape. Understanding the broader economic environment helps you anticipate challenges and opportunities, providing a solid foundation for your budget. You can monitor key indicators like industry trends, market conditions, inflation rates, and economic forecasts. This context lets you make informed assumptions and projections. 

Step 2: Set Clear Objectives

Now, determine what you want to achieve with your budget. It’s a good idea to set specific goals such as revenue targets, cost reduction goals, or capital investment plans. Clear objectives guide your budgeting process and help align your financial planning with your strategic business goals.

Step 3: Gather Historical Data

Past performance data provides insight into your business’s performance and helps you make more accurate projections. Collect financial data from previous years, including revenue, expenses, and other financial statements. Analyzing the trends and patterns in this data lets you establish a baseline for your forecasts. 

Step 4: Project Revenues

Accurate revenue projections are critical for setting realistic financial expectations, so it’s time to estimate your income for the budget period. Start with an analysis of historical sales data and consider factors such as market trends, sales forecasts, and changes in customer behavior. Evaluate potential new revenue streams and their feasibility. Develop realistic sales projections based on your products or services and the target market. 

Step 5: Estimate Fixed Costs

Next, list all your fixed expenses, such as rent, salaries, insurance, and utilities. These costs remain constant regardless of business activity. Review contracts and agreements to ensure you capture all fixed costs accurately. Fixed cost estimation is essential for understanding your baseline expenditure and ensuring financial stability.

Step 6: Estimate Variable Costs

Identify costs that vary with your level of business activity, such as raw materials, production supplies, and sales commissions. You can do this with that historic data you gathered, which helps you understand the correlation between these costs and business activity levels. Use this analysis to forecast variable costs based on your projected revenue. This helps in planning for the resources needed to support business operations.

Step 7: Plan for Unexpected Expenses

It’s best practice to have a contingency fund in your budget to cover unforeseen expenses. Planning for these helps your budget remains flexible and resilient, allowing you to handle financial surprises without major disruptions. You can do this by assessing past incidents of unexpected costs — as well as industry-specific risks — to determine an appropriate amount for the contingency fund. 

Step 8: Consolidate Departmental Budgets

Consolidation provides a holistic view of your finances and helps identify potential areas for cost savings and efficiency improvements. Combine the budgets from different departments to create a comprehensive financial overview. Ensure each department’s budget aligns with the overall business objectives and contributes to the company’s financial goals. 

Step 9: Review and Adjust

Continuous assessment and adjustment helps your budget remain relevant and effective. You can review your budget periodically and make adjustments based on actual performance and changing business conditions. Use these reviews to identify variances, analyze their causes, and make necessary adjustments. 

Step 10: Implement Budget Controls

Budget controls help prevent overspending, ensure financial accountability, and maintain alignment with your financial goals. Set up procedures to monitor and control spending. Establish approval processes for expenditures, set spending limits, and implement regular financial reviews. Use budgeting software to track expenses in real-time. 

Step 11: Communicate the Budget

Clear communication helps align everyone’s efforts towards achieving the financial goals and fosters a culture of financial responsibility. Present the budget to your team, highlighting key objectives, assumptions, and expectations. This is a great opportunity to provide training on budget management, answer questions, and make sure all stakeholders understand the budget and their roles in meeting it.

By following these steps, you can create an operating budget that empowers you to monitor performance and make strategic growth decisions.

Grow Your Budget Through Employee Wellbeing 

Operating budgets can guide your business through financial decisions by providing a structured roadmap for revenue and expense management. Including wellness programs in the operating budget is becoming more common as investing in employee wellbeing positively impacts spending and revenue. 

Wellness programs can help foster a healthier, more engaged workforce, but they also help save money. In fact, Wellhub’s Return on Wellbeing 2024 report found that 78% of HR leaders report a decrease in healthcare costs because of wellbeing programs. Healthy employees tend to be more productive, which leads to increased operational efficiency and, ultimately, higher revenues!

Explore how wellness programs can unlock benefits for your employees and the bottom line when you talk with a Wellbeing Specialist

Company healthcare costs drop by up to 35% with Wellhub! (* Based on proprietary research comparing healthcare costs of active Wellhub users to non-users.) Talk to a Wellbeing Specialist to see how we can help reduce your healthcare spending!

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Wellhub Editorial Team

The Wellhub Editorial Team empowers HR leaders to support worker wellbeing. Our original research, trend analyses, and helpful how-tos provide the tools they need to improve workforce wellness in today's fast-shifting professional landscape.


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