How to Create an Operating Budget for Your Small Business [Beginner's Guide]

What is an Operating Budget?

An operating budget is a financial plan that estimates your revenue and expenses over a specific period, typically a year. It outlines how much money you expect to bring in and what your business needs to spend to keep running smoothly. The operating budget includes everything from rent and utilities to employee wages and marketing costs.

A well-prepared operating budget gives you insights into your business’s financial health and helps you make informed decisions about managing resources, planning growth, and avoiding financial shortfalls.

Why is an Operating Budget Important for Small Businesses?

An operating budget is crucial because it helps small businesses:

• Plan Ahead: Anticipate and prepare for upcoming expenses.
• Control Spending: Avoid unnecessary costs by sticking to a pre-determined plan.
• Assess Profitability: Determine whether your business is profitable or requires adjustments to achieve financial goals.
• Secure Funding: Investors and lenders often require a detailed budget to assess the viability of your business.

By having a clear picture of your revenue and expenses, you can make strategic decisions that align with your growth objectives.

Steps to Create an Operating Budget

1. Estimate Your Revenue

The first step in creating an operating budget is to estimate your revenue. Revenue includes all the money that comes into your business, whether from product sales, service income, or other streams. Be sure to make realistic estimates based on historical data, seasonal trends, and market analysis.

• Example: If you run a small bakery, look at the revenue generated over the past year to forecast future sales. Consider any upcoming promotions or new product launches that may affect your revenue.

2. Identify Fixed and Variable Costs

Next, identify all your fixed and variable costs:

• Fixed Costs: These expenses remain consistent regardless of sales volume. Examples include rent, salaries, and insurance.
• Variable Costs: These costs fluctuate based on business activity. Examples include inventory, raw materials, and shipping expenses.

Tip: Use accounting software like QuickBooks to help categorize these costs automatically.

3. Include One-Time and Unexpected Expenses

Don’t forget to account for one-time and unexpected expenses in your budget. Unexpected costs can include emergency repairs or equipment replacement, while one-time costs might include a marketing campaign or equipment purchase.

• Example: A restaurant might need to replace a broken refrigerator, which would be an unexpected cost. Set aside a small portion of your budget each month for emergencies to avoid financial strain.

4. Calculate Projected Profits

To determine your projected profit, subtract your total expenses from your estimated revenue. This figure will help you understand if your business is profitable or if you need to adjust spending.

• Formula: Projected Profit = Total Revenue - Total Expenses
• Example: If your projected revenue is $100,000 and your expenses total $85,000, your profit is $15,000. If expenses exceed revenue, you may need to re-evaluate and cut unnecessary costs.

5. Monitor and Adjust Your Budget Regularly

An operating budget isn’t static—it should be adjusted as your business evolves. Regularly compare your actual income and expenses to your budgeted amounts to identify discrepancies.

• Example: If your marketing costs are higher than expected due to a new campaign, you might need to cut back on non-essential expenses to balance your budget.

Tip: Schedule monthly or quarterly budget reviews to ensure you stay on track and adapt to changing circumstances.

Related Article

• How to create budget for small business in 5 simple steps

Tools for Creating an Operating Budget

There are various tools available to help small business owners create and manage an operating budget effectively:

• Excel or Google Sheets: Easy to customize and ideal for small business owners just starting out.
• Accounting Software: Tools like QuickBooks, Xero, or FreshBooks can help automate budget tracking and expense categorization.
• BizGuru.ai: Use BizGuru.ai to create a Business Plan that includes budgeting and financial planning, ensuring that your small business is ready for growth and profitability.

Common Budgeting Mistakes to Avoid

• Overestimating Revenue: Be realistic about your sales expectations to avoid a cash crunch.
• Ignoring Seasonal Trends: Some businesses have predictable highs and lows; factor these into your budget.
• No Emergency Fund: Ensure you allocate funds for emergencies to avoid financial stress.