What is an Operating Budget?

An operating budget is a forecast of the revenues and expenses expected for one or more future periods. An operating budget is typically formulated by the management team just prior to the beginning of the year, and shows expected activity levels for the entire year. This budget may be supported by a number of subsidiary schedules that contain information at a more detailed level. For example, there may be separate supporting budgets that address payroll, the cost of goods sold, and inventory. Actual results are then compared to the operating budget to determine the extent of any variances from expectations. Management may alter its actions during the year to bring actual results into line with the operating budget.

Disadvantages of an Operating Budget

An operating budget tends to become less accurate for periods further in the future. To offset this issue, some organizations routinely update their budget based on the latest available information. Another disadvantage is that the management team tends to focus too much on attaining the numerical goals set forth in the budget. This can restrict their ability to take action when unplanned opportunities arise - as is likely to be the case in a competitive market.