When it comes to managing your business finances, having an operating budget is a must. Not only does it help you manage your current and future expenses, but it also enables you to prepare your financial reserve to ensure your business can survive any sudden setback or difficulty.
Operating budgets help companies stick to their revenue goals and are an essential factor in any financial decision. Amidst many companies having to face challenging financial periods because of the pandemic, having an operating budget ready can help them better strategize for what may lie ahead.
Here’s how to make an adequate operating budget for your business.
Prepare A Sales Budget
Having an operating budget helps organizations better prepare for their daily operational expenses. Budgets are often based on projections and prepared a year in advance, but finance teams will need to fine-tune this consistently to ensure it is well within their company’s set plans.
To get started on your operating budget, it’s crucial to begin with a sales budget, which projects your sales and revenue for the month. Creating a sales forecast helps you prepare for any changes in your income so you can make spending adjustments as needed. You will also need to compare your sales data from the previous year. Keep in mind that looking at your past financial figures can help improve budget accuracy.
Budget Direct Costs and Expenses
Once you have a sales budget for the year, it’s time to budget your costs and expenses. Your direct costs refer to any necessary payments made to sell your product or service offering.
Direct costs can mean any of the following:
- Material costs to produce your product
- Labor costs
- Cost of merchandise you resell
Total all direct costs for every product or service you provide.
Calculate Operating Expenses
Looking into your operating expenses from the previous year can help give you a better idea of how much you’ll need to set aside to ensure your company’s operations run smoothly. Looking into your Profit & Loss reports can be a good starting point. List your expenses according to fixed and variable expenses.
Fixed expenses can mean rent, salaries, insurance, subscriptions, licenses, and permit renewals, etc. Your variable expenses differ every month depending on your business’s core activities, including one-time purchases, supplies, contractors, hourly wages, shipping fees, and other marketing costs.
Add all recurring costs per month specific to your fixed expenses and tally an estimate of how much you spend per month on your variable expenses. This should give you an average figure of what you’re paying per month, including any overspending.
Analyze Your Gross Profit Margin
Reviewing your gross profit margin and getting useful insights can be simpler if you’ve already done this in the previous year or if you’ve been in business for quite some time. You will need to create an estimate of the costs of your sold products or services while looking into your starting inventory, purchased and manufactured goods, shipping fees. You will then need to deduct this from your overall sales revenue.
Track Your Budget vs. Actuals & Make Adjustments
Now that you have all the numbers, you’ll need to set up a budget, and it doesn’t stop there.
Companies will need to review and determine if the budget is sustainable for their growing business. This is why regular budget reviews are crucial as it allows organizations to make the necessary adjustments.
It helps calculate your net income every month, which is your total sales minus all your costs and expenses. Determine if your net income is enough to pay off any lingering debt, pay off taxes, and give your company enough legroom to save future investments.
By consistently reviewing your actual numbers and comparing this to your budget, you can best identify ways to optimize your account and reduce overspending.
If you find that it doesn’t, you can start reviewing your direct and variable expenses and identify which items you can potentially reduce or downgrade. You can also take this time to review your sales figures and explore ways to increase your sales numbers while minimizing extra costs.
Keep in mind that budgets are never fixed. You can always tweak your budget as needed to ensure your business stays profitable.
If you realize your variable expenses are higher than you expected after a few months, you can adjust your sales budget accordingly or reduce your spending.
Having an operating budget prepared ahead of time not only allows you to make the right purchase decisions so you can build your investments it also promotes better accountability across your organization.
If you’re looking for the right software that can help you work through different types of operating budgets, Performance Canvas Financials is complete with all the functionalities you’ll ever need to manage your business finances with ease.
Learn more about PCF’s different plans today.
