Operating Budget

It gives you a chance to calculate an estimated profit.
- Read Financial Management - improve financial performance

Structure of the operation budget
All operating budgets for a commercial company follow this structure:

Sale / Turnover
- Variable costs / used goods
= Gross profit
- Fixed costs
- Depreciation
- Interests
= Profit

Sale / Turnover
Sale / turnover means the ´the money you receive from the customers´ when they have purchased a product or service from you.

• If you sell 10 pairs of shoes at 100 $ your sale / turnover will be 1.000 $
• If you sell 5 hours of consultancy service at 75 $ per hour your sale /turnover will be 375 $.

Any sales tax will not be a part of the operating budget. Sales tax will be accounted for separately.
- Calculate your turn over and sale

Variable costs / used goods
In the second line of the operating budget deduct all expenses directly connected with the sale. The more you sell the higher variable costs.

• If you expect to sell 10 pair of shoes you have to buy 10 pair of shoes.
• If you expect to sell 7.000 pair of shoes you have to buy 7.000 pair of shoes.

The buying of shoes is directly connected with the selling of shoes (used goods).

If you produce leather shoes you have to buy leather (raw material). The purchase of leather will show as variable costs / used goods in the budget.

Consultants rarely have expenses concerning the "variable costs / used goods". E.g. an accountant has few direct expenses in producing the yearly accounts for a client. Maybe 20 sheets of paper. They use "hours of work". This expense will be found under Fixed costs in the operating budget.

Gross profit
The difference between Sale and Variable cost is called Gross profit. It shows how much money you have got left to pay your rent, telephone, internet access, marketing and your own pay.

It is important to have focus on that figure. If you do not have a sufficiently high Gross profit you have a bad business. Always try to optimise your Gross profit.
Gross profit is also called the contribution margin.
- Read more about Gross Profit

Fixed costs in operating budget
Fixed costs will usually not be bigger if you sell more. And not smaller when you sell less. The rent of the shoe shop will be the same whether you sell 10 pairs of shoos or 150 pair of shoes.

The staff can sell 150 shoes. But they only sell 10 pairs. It takes time to lay off staff so it is considered as a Fixed cost.
Fixed costs can be variable - like a telephone bill. It is because it does not vary with sales volume. The variation is due to other circumstances than the sales volume.

Below you find examples of fixed costs in the operating budget.

Write of / depreciation
You invest in a new building for your business. Or you purchase a 10 thousand dollar machine. These big investments you can not deduct in the accounts the first year. The investment must be spread out over several years.

One way to do it is to deduct (write of) 30 % of the value every year.

• E.g. A machine cost 10.000 $.
  - Year 1 you can deduct 3.000 $ in the operating budget (30 % of 10.000).
  - Year 2 you can deduct 2.100 $ (10.000 - 3.000 = 7.000. 30 % of 7.000 = 2.100)

For specific rules in your country contact an accountant or the relevant authorities.

Interest
If you borrow money in a bank you can deduct the interest in the operating budget. Also the different charges the bank charges for their work can be deducted.
Interest for money borrowed from family or other sources can usually not be deducted.

For specific rules in your country contact an accountant or the relevant authorities.
- Go to Operating Budget - an Example
- Calculate your needed turnover and sales - easy online tool

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		zaina, kuwait 30-03-2010 20 years on accountant

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