When to use an operating budget for more detailed planning

What is an operating budget?

An operating budget is a resourceful tool that enables businesses to estimate income projections and expected expenses and plan for low-earning or high-spending months. This financial plan provides data that constantly records the costs of your business operations for a specific period (mainly up to the end of the year). It also serves as an outline detailing how much money a company spends and incurring expenses.

The objective of an operating budget is to ensure that a business can achieve its goals while staying within its financial limits. The budget is critical for helping companies make informed decisions and monitor performance and growth.

It also helps business owners strategize for a profitable business and prepare for low-earning and high-spending periods using an efficient financial planning strategy they can also implement during the next year.

How the operating budget sits within the master budget

The master budget has two major categories: the financial budget and the operating budget. It enables both large corporations and small businesses to set goals and measure them throughout the year. Income, business costs, overhead, and production costs are the major components of the master budget.

The financial budget and the operating budget are two major categories related to the master budget. While the financial budget focuses on a company’s financial goals and strategies, the operating budget is essential for managing cash flow and ensuring that a business can afford the expenditures. Operational budgets offer more granular insights into various key aspects such as sales and types of products that are popular or yield strong returns.  

How is the operating budget created?  

An operating budget is created and compared to actual results throughout the year to track the progress of a company’s goals and financial statements. One important aspect for creating an operating budget is documenting revenue costs and expenses for the current period or predicting expenditures for the coming year.

Creating a budget involves seasonality and trends, which are essential for companies that operate in markets that experience fluctuations throughout a fiscal year. Seasonality is also important to consider especially if your product sales are dependent on weather events such as pool supplies or HVAC parts.

Many businesses use an Excel spreadsheet to calculate sums and percentages and keep their data organized. Three components of an operating budget are important to remember during the budgeting process:

• Sales budget — A comprehensive sales budget outlines the number of new products or services a company will sell and how much income it will earn depending on the cost of goods.
• Production budget — One of the most crucial components of an operating budget, a production budget details each product unit price and the sales volume needed to meet inventory requirements.
• Administrative expenses budget — An administrative expenses budget includes variable and fixed operating costs for an organization’s administrative areas. Variable expenses may cover raw materials and sales commissions, while fixed expenses include subscriptions, wages, and utilities.

What data is included in an operating budget?

An operating budget typically includes data detailing a company’s financial health and performance. Data involving capital expenditures for business operations, such as sales, inventory, and customer interactions, is used to monitor and manage daily operations, influence decision-making, and improve business processes.

For example, manufacturers may acquire a lease to borrow equipment, finance a new production line, or plan the construction of a new factory establishment. Therefore, a capital budget requires substantial capital expenditures, which companies must consider for the sake of ROI before deciding to invest.

Budget consolidation allows businesses to maintain multiple budgets in one master budget. It consists of gathering related data during a specific period and then transforming it into actionable information, especially for finance and business partners. For example, Phocas offers financial planning and analysis (FP&A) software, which allows users to get a real-time, full-funnel view of consolidated sales and marketing data.

Within the framework of the top-down strategy, management focuses on the allocation of assets to guarantee that operational expenses do not increase but promote budget flexibility.  

The bottom-up strategy works its way to the top by including all business partners.  With the help of finance and the easy-to-use software each department can prepare and forecast its sales which helps predict the resources required to hit specific targets in the company strategy.  

The process of driving an operational budget starts with an operational database setup. Many businesses only rely on pre-made Excel spreadsheet templates to calculate difficult formulas with manual input of numbers. Businesses can establish flexible budgets that align with business conditions by automating a direct feed of data from ERP systems, HRIS, sell-thru data and other data sources.  

Phocas offers driver-based budgeting (DBB), which is an efficient tool for organizing operations according to strategic goals by implementing efficient resource allocation.

Sales effectiveness depends on the ability to maintain a sales funnel effectively by generating appointments, which are highly dependent on a particular volume of outbound calls and other important targeting and personalization techniques.

It can also help you monitor crucial drivers for promoting adaptability, making budget alterations, and highlighting important performance requirements, which can help you make smarter financial planning decisions even for short-term budgeting.

Operational databases are digital workhorses that handle incoming financial data that changes and fluctuates. From fixed costs and variable costs to headcount numbers, an operational database contains many details about expenses such as rent, utilities, wages, etc. Businesses also use it as a tool for daily operations like inventory management and order processing.

Phocas users can choose between financial or operational budget settings to start the budgeting process. While Phocas selects a default database for all users, other options are available depending on what data you have flowing into your platform. If a user chooses to create a financial budget, data based on an existing Profit or Loss statement is retrieved and serves as an operational budget template. However, if they opt for the operational budget setting, budget data needs to come from a sales or purchasing database.

How the operating budget is used

Operational budgets are essential tools that manufacturers and distributors use because they offer comprehensive data about daily operations and instructions for business activities. Each budget is ideal for developing strategic plans for future profitability and growth. They also serve as a blueprint for specific objectives and goals to justify operating requests and boost profits.

An operational budget allows you to plan and distribute resources such as equipment, staff, and office supplies. Additionally, operational budgets have specific standards for maintaining and monitoring performance at various operational levels.

Business partners can assess inaccuracies, examine operational efficiencies, and act by monitoring business performance, improving financial reporting tactics, and focusing on important KPIs.

Every company’s operating budget is different and must be created and managed with a particular goal or objective in mind. You can start by examining events that occurred within the past year to understand strategic budget plans for the coming year, whether you want to boost your income or lower your expenses.

An organization's ability to reduce expenses, improve its supply chain, and boost customer satisfaction depends on its ability to implement effective inventory management strategies. Therefore, general performance and profitability can directly impact the organization depending on an executive’s skills, knowledge, and inventory management implementation methods for an annual operating budget.

Operating budgets enable you to determine any existing issues, errors, or unexpected interruptions, which can help you lower risks and become resilient. Additionally, operating budgets are essential tools for monitoring and assessing the performance of your operations, comparing your goals of the previous year, and also identifying the causes of any errors in your expense budget to avoid them during the fiscal year. You can also use operating budgets to correct any prediction inaccuracies, fix pricing errors, and reduce the total cost.

Include headcount planning in the operational budget

Headcount planning is an effective tool for operational budgeting because it involves forecasting future workforce requirements, analyzing the current workforce, and making informed decisions about recruitment and resource allocation. Headcount planning also enables companies to develop a resilient attitude toward changing operational requirements, market volatility, and potential disruptions.

Many organizations use headcount planning to ensure they hire enough employees to achieve specific goals within a set cost of a workforce budget. Hiring and human resource managers distribute assets by estimating compensation, recruitment, and unexpected expenses.

Both administrative professionals work with finance and budgeting teams to ensure planning strategies are effective. Therefore, companies can implement emergency plans to hire the right number of employees who have the skills and expertise to conduct sales forecasts and manage production schedules.

Dynamic budgeting and forecasting software can make the operational budgeting process more comprehensive and responsive. You can preserve resources and your time, boost alignment, and improve reliability by streamlining effectively.

Additionally, technology can help you create a transparent and inclusive operating budget template that matches your objectives, priorities, and goals.