Operating Budgets

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Introduction

The operating budget concerns itself with the various supporting schedules and components of the budgeted income statement. It can hence be defined as a budget (charted) that avails the outlays of the amount of money a business requires so as to run as it should. In this text, I concern myself with the identification of the various items incorporated into a security department or component of the operating budget of an organization. Further, I come up with a justification as well as rationale for each budget component and expound on the funds appropriation for each budget item.


Operating budgets: Security component items

According to Needles et al. (2007), an operating budget is typically made up of sales proceeds and cash invested into the entity and the cash being used up in terms of product development as well as other expenses the form encounters in the course of its operations. An operating budget is hence typically an important component of an organizations annual financial reports.


Income statements

As already noted above, an operating budget concerns itself with the cash the business is generation as well as the cash investors are pumping into the business. sales reports as well as income statements are what are used to present this data and with that in mind, it may be prudent to break down the income section as afar as the products being sold are concerned so as to get a true picture of how the sale of the said products is progressing. The amount of money each product earns can then be treated as a lump sum figure for income.


Office expenses

Another important component of the operating budget are the various items that would get required for the company or firm to operate at an optimum especially when it comes to the administrative as well as office part of the organization. Kemp & Dunbar (2003) notes that because the various items that an organization may need to operate at an optimum are not in any way fixed, and hence may vary from time to time, it makes sense to classify office expenses into either variable or flexible expenses. Under normal circumstances, office expenses are made up of a number of components including but not in any way limited o telephone utility bills, business cards, office furniture, papers, pens, as well as technological repairs. It is important to note that some organizations deem it fit to classify a number of expenses as administrative expenses (under the operational budget section addressing administrative expenses). Some of the expenses which may be classified under this section include travel expenses as well as client dining expenses.


Product expenses

For a business to effectively compete and remain relevant in an increasingly competitive marketplace, it must produce goods and services. it is important to note that the creation of some services is not capital intensive and in that regard, the expenses used by the same may be quite limited. This is specifically the case for writing as well as web design services. However, when it comes to manually assembled products, there may be specific needs for additional production costs including but not in any way limited to supplies and tools. For instance, for a business concerning itself with the sale of leather sofa sets, expenses (production) would comprise of; leather material, hard wood as well as working tools.


Additional funds

Essentially, it is important to note that the operation budget of an entity id made up of the various costs keep the organizations operational as well as the income generated from the various activities of the business. It therefore follows that if the organizations income exceeds its costs, more funds will be left over as far as the operational budget is concerned. It is also good to note that depending with the expenses (production) and income (overall), the additional funds in the operational budget will always vary from time to time. When it comes to the use of the additional funds, Needles et al. (2007) is of the opinion that here are two approaches the organization can use. That is, it may either retain such funds as profit or utilize them for the various organizational expenses including but not I any way limited to the payment of workers salaries as well research and development plus marketing.


According to Kemp & Dunbar (2003), the operating budget is largely focused on the income statement (budgeted) and a number of scheduled and components which essentially support the same.


Sales and collections budget

It can be noted that effective sales budgeting goes a long way to enhance a business financial model irregardless of the business nature, that is, whether it offers services or products to its clientele. This is essentially the reason why the sales and collections budget comes across as a critical step in the process of budgeting.


Cost of goods sold budget

The cost of goods sold budget concerns itself with laying out the cost of revenue components or items. It is hence critical when it comes to the disintegration of the business cost of goods sold.


Inventory and purchase budget

This budget concerns itself with a number of things including but not in any way limited to what an organization or entity intends to purchase as well as the amount of inventory the same organization sees it fit to hold over time. It is important to note that the ending inventory desired by the business informs the budgeted purchase of that business over a given time frame. Hence if the desired ending inventory is large, the purchase budget shall also end up being large. The reverse is also true.


Operating expenses budget

This budget concerns itself with the element forecasting of the various operating expenses of a business. This includes depreciation, rent, salaries etc. while we have some of these items as fixed; others appear to be relatively variable. The variability I this case is informed by the basis used, i.e. revenues or any other metric which may be utilized. It can be noted herein that though the future expenses estimate in this case is represented by the operating expense budget the figure used is based on accrual accounting.


Conclusion

In conclusion, it is important to note that the operating budget must take into consideration a number of sub budgets for it to be largely relevant. However, capital outlays must at all times be excluded from the operating budget essentially because they are taken to be long term costs whereas the operating budget is short term in its view.


 References

Needles, B.E., Powers, M., & Crosson, S.V. (2007). Principles of Accounting. Cengage Learning

Kemp, S. & Dunbar, E. (2003). Budgeting for managers. McGraw-Hill Professional

 

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