What Is an Operating Budget? - Definition & Examples

Instructor: Brianna Whiting
Creating a budget helps us plan what bills and expenses need to be paid and gives us excitement when there is some left over to splurge with. In this lesson we will learn about a different kind of budget known as an operating budget.

A Look at Budgets

We can all think of something we would love to purchase that costs more money than we have. Or maybe you have been to a store recently and saw a product you fell in love with but at the time your money was tied up somewhere else. Part of being an adult is knowing how much money you have and what that money needs to pay for. This understanding of the quantity of money and what it is being used for is known as a budget. Thus, when you went to the store and fell in love with that product but could not purchase it, it was probably because you already had other plans or obligations for your money, like paying bills and other expenses.

Operating Budgets Defined

Now, a budget is knowing the amount of money you have and planning what you will do with it. An operating budget is very similar but has a few more components. An operating budget takes into consideration what expenses a company knows it will have, the costs it expects in the future, as well as the income it predicts to make over the next year. You see, an operating budget is basically an estimate of what a company thinks future costs and income will be.

Known Expenses

One component of an operating budget consists of known expenses. These are expenses that a company knows it will have to pay. For example, electric bills must be paid to turn the lights on and keep equipment running. insurance, wages, and rent or a mortgage payment must also be paid. Many known expenses are those that occur every year, and a company expects these expenses every time it plans a budget.

Future Costs

Unlike known expenses, future costs are those that may change from year to year. They may only occur once, and may not be something the company expects to pay every time a budget is planned. For example, if a company has an old machine that looks like it will need to be replaced within the next year, it would be considered a future cost. Because the machine is not replaced yearly, and it is not known exactly when the machine will quit working, it is figured into the budget as a future cost so that the company has enough money in the budget to cover the expense of a new machine.

Future income

The last main component of an operating budget is future income. This is the part where a company tries to predict how much money it will make over the next year. For example, if a company manufactures phones and expects to unveil a new model at some point over the next year, it might anticipate an increase in profits, which would increase future income. But if a company makes only one type of phone, and a newer, better device is predicted to be released over the next year by a competitor, sales might be projected to drop because customers will want the newer phone. This would result in a lower level of future income predicted.

Example

So what would an operating budget look like? Below you will see an example of Bob's Appliance Shop to better understand how the pieces fit together.

Revenue

Sales of Appliances 165,000

Maintenance Calls 105,000

Total Revenue 270,000

Expenses

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