An operating budget is a financial plan that outlines an organizations expected revenue and expenses for a specified period. It is a detailed projection of what a company expects its revenue and expenses will be over a period of time. Operating budgets are usually formulated near the end of the year to show expected activity during the following year. They help organizations set and achieve business goals by allowing managers to compare actual results to the operating budget and analyze the outcome. An operating budget is different from a capital budget in that it is used to plan finances for daily operations and recurring expenses, while a capital budget helps businesses plan long-term spending.

The operating budget concentrates on the operating expenditures, such as the cost of goods sold (COGS), the cost of direct labor and direct materials that are tied to production, as well as the overhead and administration costs tied directly to manufacturing the goods and providing services. It does not contain capital expenditures and long-term loans. The more detailed an operating budget is, the more relevant and valuable it becomes. An operating budget may include a high-level summary along with several supporting sub-budgets that provide greater detail.

The main components of an operating budget are as follows:

• Revenue: This shows the several ways an organization generates money by offering services or selling goods.
• Variable costs: These are costs that are directly related to a businesss main activity.
• Fixed costs: These are costs that are not directly related to a businesss main activity.
• Non-operating expenses: These are expenses that fall below Earnings Before Interest and Taxes (EBIT) or Operating Income.
• Capital costs: These are long-term costs and are not ordinarily part of an operating budget.

Creating an operating budget is a collaborative effort involving executives and managers. First, they must estimate the coming years revenue. This involves checking the firms historical performance and then considering market variables that may impact revenue. Smaller operating budgets can lead to higher profitability, but limited budgets can also limit growth.