Make an operating budget: how to calculate your expected profit

What is an operating budget?

An operating budget sets out your expected revenue and costs for a specific period. You can create a budget for 1 year, for example, but you can also look ahead several years. An operating budget is also known as a profit and loss budget.

Start by estimating your revenue. Then subtract the costs you expect to incur. The difference is your expected result. Is your revenue higher than your costs? Then you expect to make a profit. Are your costs higher than your revenue? Then you expect to make a loss.

How to create an operating budget

First, estimate how many products or services you expect to sell and the price you will charge. This will give you an estimate of your revenue.

Then calculate your costs. Think about the cost of inventory or materials, rent, insurance, energy, marketing, and staff. Depreciation of business assets is also a cost. For example, have you invested in machinery for your workshop? If so, you do not include the full purchase price as a cost. Instead, you include the yearly depreciation.

Make your budget as realistic as possible. For example, use quotations, previous sales figures, and information about your market to support your estimates. You can also create different scenarios. For example, ones where your revenue is higher or lower than expected.

What costs does your business have?

The costs your business has depend on its activities. For example, a workshop incurs costs for materials, maintenance, and energy. While a consultancy is more likely to have costs for software, office space, and insurance.

Also distinguish between fixed costs and costs that change when you sell more or less. Rent and subscriptions, for example, are fixed costs. The cost of materials or inventory may increase as your sales increase.

Costs and expenses are not the same

Costs and expenses are not the same. You include costs in your operating budget. Expenses are payments that actually leave your bank account or cash register. You include these expenses in your cash flow forecast.

For example, if you buy a machine for €15,000, the €15,000 is an expense when you pay for the machine. Because you will use the machine for several years, you do not include the full €15,000 as a cost. Instead, you spread the cost over several years through depreciation in your operating budget.

Example of an operating budget

How do you calculate depreciation?

In the investment budget, €28,000 has been invested in business assets. For this example, we assume a depreciation period of 5 years and a total residual value of €3,000.

The annual depreciation is:

(€28,000 − €3,000) / 5 years = €5,000 per year

Adjusting your plans

You can compare your operating budget with your actual figures during the year. This allows you to see where the results differ from your expectations and adjust your plans if necessary.

Operating budget as part of your financial plan

The operating budget is part of your financial plan. Complete your plan with an investment budget, liquidity budget, and financing budget.

Also add a personal budget showing how much money you need for personal expenses and how much income your business must generate to cover those costs.