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A budget is essential for managing resources and making informed financial decisions. It is a plan for expected income and expenses that helps you ensure that you are spending your money in the most efficient way possible. An operating budget is a type of budget used to plan and control the day-to-day operations of an organization.

This guide will provide a comprehensive overview of operating budgets, including what they are, how to calculate them, which components are included, and how to best use them to support your business or organization.

What is an Operating Budget?

An operating budget is a financial plan that outlines the expected income and expenses of an organization over a set period of time, typically one year. The purpose of an operating budget is to help an organization manage its resources more effectively and achieve its goals. It is a tool for making informed decisions about allocating resources, prioritizing expenditures, and tracking performance.

Components of an Operating Budget

The key components of an operating budget are revenues and expenses.

  • Revenues are the sources of income for an organization, such as sales, grants, or investment income.
  • Expenses are the organization's costs, such as salaries, supplies, and rent.
  • Key performance indicators (KPIs) are also often included in an operating budget to help track the organization's progress toward its goals.

How to Calculate the Operating Budget?

Calculating an operating budget can seem daunting, but it is a critical step in managing your organization's finances effectively. The following are the steps to calculate an operating budget:

  • Determine the time frame: Start by determining the period for which you want to create your operating budget. Most organizations develop budgets for a full fiscal year, typically from January to December.
  • Review past data: Look at past financial statements, such as balance sheets, income statements, and cash flow statements, to get a sense of your organization's spending patterns and revenue streams.
  • Identify revenue sources: Determine the sources of income for your organization, including sales, grants, investments, and other sources of revenue.
  • Estimate expenses: Estimate the costs you will incur in the budget period. This includes both fixed expenses, such as rent and salaries, and variable expenses, such as supplies and travel.
  • Check for accuracy: Compare your budget to your actual financial data from the past few years to see if your budget is accurate.
  • Make adjustments: If necessary, adjust your budget based on your findings.
  • Update regularly: Operating budgets should be updated regularly to reflect changes in revenue, expenses, and goals.

Operating Budget Methods

There are several methods for calculating an operating budget, including:

  • Bottom-up approach: This approach starts by calculating the expenses for each department or unit of the organization and then aggregating them to get the overall operating budget.
  • Top-down approach: This approach starts by estimating the overall operating budget and then breaking it down into expenses for each department or unit of the organization.
  • Zero-based budgeting: This approach starts with a clean slate and builds the budget from scratch, taking into account only the essential expenses required to achieve the organization's goals.
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Operating Budget vs. Capital Budget

It's important to distinguish between an operating budget and a capital budget, as they serve different purposes and have different components.

A capital budget is a budget for long-term investments, such as buildings, equipment, and land. It is used to plan and control expenditures for major projects that will have a lasting impact on the organization. Capital budgets often have a longer time frame, usually several years, and are typically updated less frequently than operating budgets.

In contrast, an operating budget focuses on the day-to-day operations of the organization and is typically updated on an annual basis. It is used to plan and control expenses for things like salaries, supplies, and rent, as well as to monitor the organization's performance and make informed financial decisions.

Operating Budget Template

An operating budget template can be a valuable tool for creating a budget, as it provides a structured format and can save time in the budgeting process. There are many operating budget templates available online, so choosing one that fits your organization's needs is important.

Here is an example of an outline for a basic operating budget template:

  • Revenue
    • Sales
    • Grants
    • Investments
  • Expenses
    • Salaries
    • Supplies
    • Rent
    • Travel
  • Key performance indicators
    • Net income
    • Gross margin
    • Operating expense ratio

Ready to get started with creating your operating budget? Download a free operating budget template. The template includes all the necessary formulas and sections to help you create a comprehensive operating budget. Simply enter your organization's specific financial information and start planning and controlling your expenses today.

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Operating Budget Examples

An operating budget can be created for any type of organization, including for-profit businesses, non-profit organizations, and government entities. The components and format of an operating budget may vary depending on the type of organization. Still, the purpose remains the same: to plan and control expenses and achieve the organization's goals.

For-profit businesses may create an operating budget to manage their expenses and maximize profits. Non-profit organizations may develop an operating budget to ensure they have enough resources to achieve their mission. Government entities may create an operating budget to plan and control their expenditures and ensure that they are using taxpayer dollars efficiently.

Annual Operating Budgets

An annual operating budget is a budget that is created for a period of one year and is typically updated every year. An annual operating budget provides a comprehensive overview of the organization's expected income and expenses and helps the organization make informed financial decisions.

Non-Profit Operating Budget

A non-profit operating budget is a budget created for a non-profit organization. Non-profits are organizations that are not established to make a profit but rather to achieve a specific mission. A non-profit operating budget is used to plan and control expenses and ensure the organization has enough resources to accomplish its mission.

Flexible Budget Net Operating Income

A flexible budget net operating income is the difference between the flexible budget and actual expenses. A flexible budget is a budget that adjusts to changes in the activity level, whereas a static budget does not. The flexible budget net operating income helps organizations track their actual performance against their budget and make informed financial decisions.

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Operating Budget Best Practices

Here are some best practices for creating and using an operating budget:

  • Start early: Start the budgeting process as early as possible so that you have enough time to make informed decisions.
  • Involve key stakeholders: Involve key stakeholders in the budgeting process, including department managers and senior leaders.
  • Use data: Use financial data from the past few years to inform your budget and make sure that your estimates are accurate.
  • Be realistic: Be realistic about your expected income and expenses, and make sure that your budget is achievable.
  • Update regularly: Update your budget regularly to reflect changes in the organization's financial position and make any necessary adjustments.
  • Monitor performance: Regularly monitor your budget performance and compare actual results to your budget. This will help you identify areas where you are over or under budget and make informed financial decisions.
  • Communicate with stakeholders: Communicate your budget to stakeholders, including employees, board members, and other stakeholders, so that everyone is aware of the organization's financial position and goals.
  • Consider future changes: Consider potential future changes, such as inflation and changes in the economy, when creating your budget. This will help you make informed decisions and be prepared for any challenges that may arise.
  • Review and adjust: Regularly review and adjust your budget as needed to ensure that it remains relevant and accurate.

Creating and using an operating budget is an essential aspect of financial management for any organization. By following these best practices, you can ensure that your budget is accurate, relevant, and useful in helping you achieve your financial goals.

Conclusion

An operating budget focuses on an organization's day-to-day operations and is used to plan and control expenses. It is an essential tool for financial management and can help organizations make informed financial decisions, achieve their goals, and improve their financial performance.

By following best practices and using an operating budget template, organizations can create an effective operating budget that meets their unique needs and helps them succeed.

Hady ElHady
Hady is Content Lead at Layer.

Hady has a passion for tech, marketing, and spreadsheets. Besides his Computer Science degree, he has vast experience in developing, launching, and scaling content marketing processes at SaaS startups.

Originally published Feb 9 2023, Updated Jun 26 2023

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