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What are the most important steps for creating an operating budget in a service-based business?

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An operating budget is a plan that shows how much revenue and expenses a service-based business expects to generate and incur in a given period. It helps to monitor performance, allocate resources, and plan for the future. Creating an operating budget can be challenging, especially for service-based businesses that rely on intangible assets and variable costs. Here are the most important steps for creating an operating budget in a service-based business.

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Joshua Bloom

Audit Director | Manufacturing | Not-for-Profit

1 Identify revenue sources

The first step is to identify and estimate the revenue sources for your service-based business. These may include fees, subscriptions, contracts, grants, donations, or other income streams. You need to consider the demand, pricing, and timing of your services, as well as the market conditions and competition. You can use historical data, industry benchmarks, or projections to estimate your revenue. Be realistic and conservative, and account for any uncertainties or risks that may affect your revenue.

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Joshua Bloom

Audit Director | Manufacturing | Not-for-Profit
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Look at your sales journal and go through the data to see who your major customer types are, what they are buying, etc. Doing some data mining can provide information about your revenue sources.

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2 Estimate expenses

The next step is to estimate the expenses for your service-based business. These may include fixed costs, such as rent, utilities, salaries, insurance, and taxes, and variable costs, such as materials, supplies, travel, marketing, and commissions. You need to consider the quality, quantity, and frequency of your services, as well as the efficiency and productivity of your operations. You can use past records, vendor quotes, or industry standards to estimate your expenses. Be accurate and detailed, and account for any contingencies or opportunities that may affect your expenses.

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Joshua Bloom

Audit Director | Manufacturing | Not-for-Profit
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To figure out expenses, you can try to break apart expenses into different types: - fixed costs - doesn’t fluctuate with volume generally - variable costs - fluctuates with volume - mixed costs - hybrid of fixed/variable Once you map out your expense types it’s easier to figure out expenses at different volumes.

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3 Calculate net income

The third step is to calculate the net income for your service-based business. This is the difference between your revenue and expenses, and it shows how profitable your business is. You need to compare your net income with your break-even point, which is the minimum amount of revenue you need to cover your expenses. You also need to compare your net income with your target income, which is the desired amount of revenue you want to earn. You can use formulas, ratios, or charts to calculate and analyze your net income.

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Joshua Bloom

Audit Director | Manufacturing | Not-for-Profit
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You can also forecast cash flows if you know when you are going to get paid and when you will pay bills. You will also be able to map out when you might need additional financing sources and when you need to make payments on any financing.

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4 Adjust and optimize

The fourth step is to adjust and optimize your operating budget for your service-based business. This is the process of reviewing and revising your budget based on your actual results, feedback, and changes in the internal and external environment. You need to monitor and measure your budget performance, identify and evaluate any variances or deviations, and implement any corrective or preventive actions. You also need to optimize your budget by finding ways to increase your revenue, reduce your expenses, or improve your efficiency and effectiveness.

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5 Communicate and collaborate

The fifth step is to communicate and collaborate with your stakeholders on your operating budget for your service-based business. These may include your employees, customers, suppliers, investors, lenders, or regulators. You need to share and explain your budget assumptions, goals, and results, as well as solicit and respond to their feedback and suggestions. You also need to collaborate with them on your budget implementation, monitoring, and adjustment, as well as align your budget with their expectations and interests.

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6 Update and forecast

The sixth step is to update and forecast your operating budget for your service-based business. This is the process of updating your budget based on the latest information, data, and trends, as well as forecasting your future budget based on your current and projected performance. You need to update your budget regularly, such as monthly, quarterly, or annually, and adjust it accordingly. You also need to forecast your budget for the next period, such as the next month, quarter, or year, and plan ahead.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the most important steps for creating an operating budget in a service-based business?

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1 Identify revenue sources

2 Estimate expenses

3 Calculate net income

4 Adjust and optimize

5 Communicate and collaborate

6 Update and forecast

7 Here’s what else to consider

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