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What Is Operating Budget? - Definition & Examples

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  • 0:00 What Is An Operating Budget?
  • 1:05 Examples
  • 3:37 Budget Reports
  • 4:17 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
What are operating budgets? In this lesson, learn about how operating budgets are created and explore how they can be used to help businesses succeed. Some examples will be given.

What is an Operating Budget?

Maintaining a healthy business requires careful financial planning and budgeting. Companies use a master budget to manage their cash and other assets, and to estimate their future sales and expenses. Master budgets are made up of two parts that work together: financial budgets and operating budgets.

Financial budgets focus on cash and capital expenditures. They are used to make sure that the business has the cash it needs to fund its operations and to maintain and/or upgrade its buildings and equipment.

This lesson covers operating budgets, which are detailed plans that estimate how much income a company expects to make and what it thinks its expenses will be in the short-term, typically within a year. Companies normally use separate operating budgets to create plans for each area of their business. Examples of commonly used operating budgets are sales, production or manufacturing, labor, overhead, and administration.

Diagram of a Master Budget

Once budgets are in place, companies can use them to manage activities, compare how they are earning or spending against these budgets, and prepare for future business cycles.

Examples

Operating budgets offer a way for companies to estimate what their revenues and expenses might be in the immediate future, and to make preparations to support any variations. To see how operating budgets work, let's look at an example of them in action.

Imagine you own a beach hotel and resort and are preparing operating budgets. You'll begin with the sales budget first - because it affects all the other budgets. The sales budget includes everything that brings in cash: hotel room rentals, restaurant and bar sales, valet and parking revenue, internet fees, and conference room sales.

The sales budget is your best guess at what revenue will be coming in for the time period, and you'll need to think through several things when preparing it. At your beach resort, seasonal factors will greatly affect your sales; hurricane seasons or college spring break schedules will either scare people away or cause them to flood in. Other factors, like special events, tourism trends, and economic conditions can also affect the traffic at your resort. Most managers look at the previous year's actual income to estimate sales budgets for the next year.

Next up are the expense budgets - the costs of doing business to earn income. In your resort, there will be an operating budget for labor - employees like housekeepers, landscapers, lifeguards, and front desk personnel. There will likely be a budget for marketing and sales, and another for materials such as housekeeping supplies, linens, snack items, beach towels, and newspapers. Overhead expense budgets include costs such as utilities, insurance, mortgages, property taxes, and interest expenses.

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