A business will have many different types of budgets, each serving a specific purpose. Such budgets include the operating budget, sales, budget, static budget, and cash-flow budget. Budgets interrelate to one another giving a full financial picture of the company.
The Operating Budget
The operating budget is one of the two parts of a company’s master budget. The purpose of the operating budget is to describe the income-generating activities of the firm such as sales, production, and finished goods inventory. This statement includes the day-to-day revenue and expenses—of which the COGS is a large part—for those operations. Elements that make up the operating budget include:
Operating expensesCost of goods soldRevenue or income
The operating budget is the pro forma or standard form of the income statement and the operating profit margin. The operating profit margin is not the same as net profit, which you cannot calculate until you prepare the financial budget. The operating budget is prepared before the financial budget since many of the financing activities aren’t known until the operating budget is prepared.
The Sales Budget
The first and most basic component of the operating budget is the sales budget, which lists the expected units and revenue expected from the sales plan (do you have a sales plan?). The more accurate your sales forecast, the more effectively you can manage the business. The sales budget memorializes a business’ sales expectations for the coming accounting or budget period and attaches gross revenue to the sales plan. It is expressed in both units and dollars. Smaller companies, with limited product categories and territories, may develop the sales budget for the business overall. Larger companies, with an array of products, usually aggregate the budget into product categories and/or geographic regions for the sake of simplicity and getting the job done on time. The sales budget is usually prepared and presented in a monthly or quarterly format (a yearly format provides little actionable insight and does not highlight opportunity). Several departments contribute to the sales budget. Of course, the majority of input comes from the sales team, who deal with customers on a day-to-day basis. Marketing contributes promotional information, which can affect both the timing and volume of sales. Engineering may have insight into new product development and release dates, as well as the discontinuance of older products. The executive team may review and revise these figures based on planned divestitures or acquisitions.
Sample Budget
In developing a sample operating budget, I’m going to use a small pottery business, ArtCraft Pottery, located in Zanesville, OH, as my example. They produce reproductions of the famous art pottery produced in the Ohio area in the early 1900s. If we use ArtCraft Pottery as our example, the following information can be used to develop the cost of goods sold budget. In order to develop the cost of goods sold budget, we have to have information from the direct materials budget, the direct labor budget, the overhead budget, and the ending finished goods inventory budget. Using information from these budgets, we can develop the following cost of goods sold budget: There is one footnote beside direct materials. *Production needs = (5720 pots X $3) - (28,600 oz paint X $0.20)
