Operating Budget

What is an operating budget?

An operating budget is a comprehensive estimate of an organization, company, or institution’s revenue and expenses over a specified period of time. This budget is usually prepared in advance as a goal or a plan of what to expect during the specified reporting period.

Operating budgets help companies and organizations achieve their financial goals. For example, as an HR manager, you can use it to assess your department’s performance by comparing the actual results to the operating budget.

The information obtained can help you decide:

• If the revenues are more or less as estimated
• Identify any unexpected expenses
• Whether the estimates need adjustments or not.

What is an annual operating budget?

As the name suggests, an annual operating budget is a detailed statement of an organization’s estimated revenue and expenses over a year. The budget acts as a reference point for all your activities over the next twelve months.

Annual operating budgets help managers make informed decisions during tough financial times, like when unexpected expenses arise. 

Operating budget vs capital budget

A capital budget is a detailed financial plan of all the long-term capital expenses an organization expects. This includes investments in property, stocks, or new equipment. Capital budgets enable organizations to monitor their spending and ensure they have enough money to meet upcoming expenses.

Apart from their definitions, here are other major differences between operational budgets and capital budgets:

1. Time

Operational budgets usually have shorter durations as compared to capital budgets. For example, software programs that need monthly or yearly subscriptions are operational while necessary costs such as office buildings take longer to pay off and therefore fall under a capital budget.

2. Type of asset

An asset your organization plans to acquire can determine whether it’s operational or capital. For example, if you plan to lease a space for your department, that becomes an operational budget, but if you purchase, it’s considered a capital expense.

3. Type of purchase

Operational budgets include purchased items or services that make daily operations easier and more productive, like cell phones and the internet. 

Capital budgets, on the other hand, help create a healthy working environment and are included in the organization’s overall expenses. For example, items such as computers and health insurance covers fall under capital budgets.

Components of an operating budget

For an operational budget to be more valuable and relevant, it has to be as detailed as possible. In most instances, the budget may have an overall summary with other supporting sub-budgets that offer more details.

Generally, an operating budget should have these components: 

• Revenue: This shows the several ways an organization generates money by offering services or selling goods. Although the projected revenue may be annual, breaking it down further into individual components, like average or unit price, makes the budget more insightful.
• Variable cost: Refers to expenses that fluctuate and impact revenues. Costs such as raw materials, sales commissions, freight, and labor fall under this category.
• Fixed cost: These are expenses that must be paid whether sales increase or decrease and remain fairly constant. Examples include insurance, rent, and equipment leases. 
• Non-cash expenses: These are expenses that typically have no impact on cash flow, but will affect the financial reporting performance at the end of the year. They include expenses such as depreciation, deferred income taxes, stock-based compensations, and amortization.
• Non-operating expenses: Refer to expenses that are not directly linked to an organization’s or a company’s main activity. They include gains or losses, interest, and taxes. 

HR tip

Creating an operating budget for any organization is a collaborative effort that brings onboard executives and managers.  As a human resource manager, you are responsible for developing a budget for your department. This budget will ultimately add up to the final budget of the organization. Knowing how to develop an HR budget is therefore extremely crucial.

How to prepare an operating budget

When preparing an operating budget, there are some factors to consider:

• Know the revenue: It’s important to list all the sources of income and where they’re coming from. This will you get a clear picture of the entire monthly, quarterly, or yearly revenue.
•  Look at the variables: Examine what could affect incoming sales. Some of the factors to consider include changing trends in your industry, new products the company intends to launch, economic changes, competition, and seasonal changes in sales, if any.
• Calculate expenses: List all your expenses and run the figures to estimate your costs. An HR operating budget may have costs like recruitment expenses, replacing old tablets or laptops, changing benefits, and more.

Human resource is a critical department in any organization. HR teams play key roles, from handling recruitment and payrolls to managing employee relations. And this is why managing all these functions costs money.

As an HR professional, it’s therefore crucial to know how much money your department needs and how to apportion it. Understanding an operating budget and how it’s prepared can help you avoid making costly mistakes.