What is an annual operating budget? Explanation and examples.

An annual operating budget can help you keep your business finances on track and promote organizational growth. Learn how to make one with this helpful guide.

An annual operating budget, by definition, is a statement of expected revenues and expenses over 12 months. Knowing what to expect financially makes it easier to stay on track, achieve your goals, and manage unexpected expenses — so include every expected source of income, regular operating costs, and all your expected expenses.

Why are annual operating budgets important?

One of the primary reasons that businesses use annual operating budgets is to set goals. Once you know how much you’re spending and how much more you need to earn, you can help your sales teams and other teams to set goals accordingly.

Annual operating budgets can help your business be prepared and make smart choices. Each time you need to decide throughout the year about an expenditure or a new initiative, you can consult your budget to learn whether it fits your plan or will come at the cost of other crucial resources. You can identify when a short-term cost will likely result in new revenue and determine whether your business can continue operating until then. An effective budget will be conservative, setting aside enough money in reserve for emergencies or for when things don’t go as planned.

In addition to unexpected costs, you might earn unexpected revenue as the year unfolds. With a budget in place, you can know right away where to best reinvest those earnings rather than using them inefficiently. A budget that shows revenue and expenses can demonstrate to investors that you have a solid business plan and can be trusted.

Is an operating budget for revenue or expenses?

You might wonder if an operating budget is for revenue or expenses, and the answer is both. These are the two most basic components considering that the most basic purpose of a budget is to anticipate and track the money coming in and going out.

What are the components of annual operating budgets?

A spreadsheet or a table is a helpful format for an operating budget so that you can track income, itemize expenses, and make easy calculations. You can list anticipated revenue at the top and then include multiple rows for itemized expenses to calculate net earnings at the bottom. Or you can break it out into separate rows or columns for different departments and types of costs.

What is included in an operating budget?

The distinct categories of your budget will depend on your industry, the size of your business, and other factors. But all operating budgets start with these major categories:

• Revenue. Consider all the income you anticipate earning, including sales and investments.
• Fixed costs. These stay the same even when sales volume does not. Consider salaries, rent, utility bills, insurance, and all other recurring expenses at a fixed rate.
• Variable costs. These fluctuate depending on sales volume. Plan for the cost of raw materials, packaging, supplies, fees, hourly wages, and deliveries.

Some businesses might include separate categories to determine cash flow or non-operating expenses such as interest and taxes. Non-cash expenses include the depreciation and amortization of assets.

Is an annual operating budget for nonprofits different from corporate ones?

The main difference for a nonprofit annual operating budget is the document’s purpose. While corporations focus on increasing revenue, nonprofit organizations are motivated to document their annual operating budgets to show that they’ve used funds responsibly and purposefully. The income structure also differs because nonprofits usually generate income from grants rather than sales.

How to create an annual operating budget for your business.

Although it may take some foresight and research, creating an annual operating budget is relatively simple if you follow the steps below:

1. Estimate your total operating expenses for the year.
2. Estimate your total revenues for the year.
3. Include contributions to your reserves.
4. Determine expected net revenues for the year.

When creating your annual operating budget, be as detailed as possible. It’s best to itemize each expense and source of income so you know exactly where the money is going to or coming from and when.

Annual operating budget example.

The categories in your budget can vary depending on your business or business goals. At a minimum, you’ll need a column for last year’s numbers and two more columns — one for what you anticipate spending next year and another as a blank column that you can return to later to record actual expenses.

Example 1

Your next step is to build out new rows for itemized costs or more specific categories.

Example 2

If your budget is sales-oriented, another option is to include rows for volume, price per unit, and revenue at the bottom.

How to make an annual operating budget PDF.

Organize your information using an Excel spreadsheet to make it easy to edit and read the information. Remember, anything can happen in a year. So be prepared for those moments when you may have to adjust your estimated annual operating budget.

Once you build your spreadsheet, create an operating budget PDF by converting your Excel file to share and collaborate with your team members. You can also learn about other ways to work with PDFs online to simplify teamwork.

Tips for creating an annual operating budget.

1. Gather data. Acquire detailed records of the past year’s revenue and expenses and relevant information about factors that will influence the next year.
2. Get feedback from each team or team member. While quantitative data is helpful, it’s also important to gather qualitative feedback from your team on what influences the data. Find out how they think the next year will go and what factors you should consider as you build the budget.
3. Play it safe. If you overestimate expenses and underestimate revenue, you’ll be better prepared and more likely to be happy with results at the end of the year.

More resources on budgeting.

After learning about an annual operating budget, explore more resources on budgeting:

• Get to know zero-based budgeting.
• Learn how to create a weekly budget.
• Learn how to budget for rent payments.
• Learn how to create a monthly budget.
• Learn how a budget approval process works.

Learn more about how Adobe Acrobat can help you create, share, and edit financial documents.