PREPARING THE

OPERATING BUDGET
PRESENTED BY GROUP 3

GROUP MEMBERS:

ABASANTA, EARL LAURENCE

MAGLASANG, JAMES ETHAN
MANTAL, MARIA LIE
DELA PEÑA, MARY BLESSY
TINAPAY, ASHLEY A.
GONZALES, ERRICA
 OBJECTIVES TO LEARN ON
PREPARING THE OPERATING
BUDGET:

Expenditures:
-Identify and analyze daily costs and their
impact on finances.
Gross Income:
-Calculate income after expenses.
Operating Income:
-Assess its role in decisions and planning.
Operational Planning:
-Understand the value of effective planning.
EXPENDITURES
Understand how to identify and categorize
daily operational costs such as salaries,
materials, and utilities.
Learn how expenditures impact the overall
financial health of the organization.

INVENTORY TURNOVER

Analyze how inventory management affects

operational efficiency and cash flow.
Understand the relationship between
inventory turnover and budget planning.
GROSS INCOME OPERATING INCOME

Learn to calculate gross income from Understand how operating income is

operational activities. derived from revenues minus operational
expenses.
Recognize the role of gross income in
assessing profitability and setting budget Evaluate the significance of operating
priorities. income in decision-making and long-term
planning.
 OPERATIONAL
PLANNING

Develop skills to create plans that align

operational budgets with organizational
goals.

Explore how operational planning integrates

forecasts and resource allocation.
WHAT IS AN OPERATING
BUDGET ALL ABOUT?

Operating Budget

An operating budget is a plan that shows how much

money an organization expects to earn and spend
during a specific time, usually a year. It helps guide
everyday decisions about spending and ensures the
organization stays on track to meet its goals. The
budget includes things like salaries, office supplies,
marketing costs, utility bills, and income from
products or services. Simply put, the operating
budget is a financial roadmap for the organization.
 Different from Capital Budgets:
Focuses on daily operations, not major investments like real
estate or equipment.

Estimates Expenses and Income:

Includes costs like salaries, equipment, and future income
generated by operations or projects.

Key Financial Tool: Helps identify, quantify, and report financial

data through:
1. Budgeting.
2. Financial statements.
3. Operational plans and forecasts.

Strategic Planning:
Guides business goals and determines necessary financing.

Covers Daily Operations:

Plans anticipated income and expenses for a specific period.

Seasonal Adjustments:
Accounts for variations throughout the year.

Largest Part of Budgeting:

Represents the main component of the budgeting process.

Annual Basis:
Typically created yearly for efficient resource management.
 The following is a basic process for
creating a comprehensive Operations
PREPARING THE Budget:
OPERATING BUDGET 1. Expenditures
Identify expenses for the current period.
Examine all expenditures for all business
operations. Rent, storage, transportation,
Individual operating budgets are created
marketing, and administrative costs should be
for each operation by the assigned
reviewed and included. Include any funds that
department/division manager. A budget
were allocated and spent to keep the business
coordinator provides actual expense
in operation in the expenditures total.
reports for the current period, as well as
for the prior period.
2. Inventory Turnover
Identify production for the current period.
Determine how many units are produced and
sold during the current period. The units
produced, minus those sold, indicates
inventory turnover. Inventory turnover is
important for trend analysis.
3. Value of Goods/Services
The value of goods or services expressed in cost per unit measure may be calculated by dividing
expenses by production.

4. Gross Income
This is the calculated revenue from the units sold, before expenses.

5. Profit Margin
The profit margin may be used to forecast future profits, when the calculated profit margin is positive.
It is an indication to reduce expenses or increase costs, if the calculated profit margin is negative.

6. Analysis
The Operating Budget gives an overview of the performance of each operation sector during the
period to which the budget report applies. Any variance between actual performance and operating
budget must be explained and adjusted or accommodated, as necessary.
B. EARNINGS AND
OPERATING INCOME

The Operations Budget should clearly define the firm's

earnings and income. LARGER FIRMS' earnings and
income include income from selling products and
services, as well as from investors and shareholders.
SMALL BUSINESS' or INDEPENDENT CONTRACTORS'
earnings and income may be generated exclusively
from products or services sold.
 EARNINGS DEPRECIATION

Operating earnings measure profitability. It does not refers to the gradual reduction in value of
include non-operating expenses (interest and taxes). tangible fixed assets (like machinery,
buildings, or equipment) over their useful life.

OPERATING INCOME (EBIT) AMORTIZATION

Operating income is "Earnings Before Interest and is similar to depreciation but applies to
Taxes (EBIT)". It is the realized profit from operations intangible assets, such as patents,
after deducting operating expenses (cost of goods trademarks, or goodwill. It spreads the cost
sold (COGS), depreciation, amortization, and wages). of these intangible assets over their useful
life
Depreciation and Amortization are excluded from expenditures in the operating budget
because they are non-cash costs. This means that, even though these costs are recorded in
the books, they don't actually involve spending money.
Depreciation is when the value of something like equipment or machinery goes down
over time.
Amortization is similar but for things like patents or software that lose value over time.
EBIT is described as revenues minus expenses. Operating income may be found by
calculating the gross income:

Formula:

Gross Income = Revenue – Variable Costs

And subtracting fixed cost operating expenses, depreciation, and amortization.

Operating Income = Gross Income - Operating Expenses – (Depreciation + Amortization)

 C. OPERATING EXPENSES OPERATING EXPENSE IS A KEY
COMPONENT OF A FIRM'S

Elements that affect operating expenses include:

pricing strategy
cost of goods sold (COGS)
cost of materials
labor costs, and
economic flexibility and proficiency of the firm's management A business will invariably
incur production expenses. This is especially true for a business that manufactures or
directly produces a product or service. The Operating Budget is particularly beneficial in
showing, and limiting, how much is allocated to certain production operations. Budgets
monitor expense accounts to ensure that capital is appropriately used or invested and
not wasted on non-essential items. It also helps ensure the firm does not 50 | ACC 12
Entrepreneurial Accounting Rev1 excessively pay for economic resources used in the
business. Often this results in procuring new vendors or suppliers to reduce cash outgo.
 D. OPERATIONAL PLANNING

Budgets are used to develop plans for future growth and expansion. Operational planning
uses the Operation Budget to strategically map particular goals and objectives with the
intent of increased profit. An operational plan is routinely used to justify operating budget
requests. A typical strategic operational plan is a Five-Year Plan. This would normally
require "five operational plans funded by five operating budgets." Operational planning
involves establishing milestones and conditions for goal achievement. The strategic plan
must include details on
how the plan will be implemented
what plan components will be put into operation, and
when the plan components will be put into operation
Commercial applications of the strategic plan may be activated during a pre-determined
operational period, typically within the fiscal year. Expenses may be mitigated accordingly.
For example, if too much has been spent on production in relation to sales, the strategic
plan may require different products that can be produced for less and sold for more, be
made, to cover production fees.

Although budgets can assist in providing a financial road map for future business
operations, many budget variances do not appear as negatives. Reserve accounts may be
created so capital that has been saved on regular business expenditures may be deposited
for designated new business opportunities. Budgeting for the future ensures capital is
available when opportunities appear, and quick decisions for expanding operations must be
made. The reserve account also serves as an operations safeguard during slow economic
periods
THANK YOU