An Ultimate Guide to Operating Budgets

Arjun Ruparelia

on Jun 17, 2025

QUICK SUMMARY

Operating budgets forecast your income and operating costs to keep your business running smoothly. But how do you create one that actually drives results? Discover the key components of an effective operating budget and how to build your own in this ultimate guide.

TABLE OF CONTENTS What Is An Operating Budget? Operating Budget vs. Capital Budget How Operating Budgets Are Used Everything Needed For Operating Budgets How to Build an Operating Budget Top 5 Benefits Related Challenges Best Practices Operating Budgets With Software

Key Takeaways

Operating Budget Breakdown: An operating budget serves as a financial blueprint for business operations, helping to allocate resources and maintain focus on strategic initiatives over a specific period.

Building a Successful Operating Budget: Start your budget by estimating your revenue. Make sure to look at historical data, market trends, and the economy to help shape your estimate. Then determine projected expenses and put it all together.

The Right Operating Budget: With a well thought out operating budget, you'll gain improved financial control, better decision-making, and enhanced performance and accountability.

Operating budgets are often treated as static financial statements and a compliance exercise to be completed at the end of the year. In the modern world, that’s a dangerously outdated mindset.

During my career as an accountant, I learned one important rule: an operating budget is not just a plan. It's a control system—it’s how strategy gets translated into action and how performance is measured.

In this guide, I use my experience in accountancy and budget generation to help you understand what an operating budget really is, how it’s built, used, and optimized, and why getting it right is mission-critical.

What Is An Operating Budget?

An operating budget is the financial blueprint for running day-to-day business operations over a specific period of time.

It outlines expected revenues and planned expenses, allowing you to allocate resources, monitor performance, and stay focused on strategic initiatives.

An operating budget answers two critical questions:

How much are you expecting to generate in revenue?
How much will it cost to keep the lights on, people paid, and business running efficiently?

Suppose your company offers a subscription-based project management tool. Your operating budget for the upcoming year might look like this:

Particulars	Amount ($)
Revenue	10,000,000
Cost of Revenue	(2,000,000)
Operating Expenses	(6,000,000)
Operating Income	2,000,000

Of course, this is just an overview. You can break down each category in the budget to estimate specific expenses, such as R&D, salaries, office supplies, and more. Together, these numbers provide you with a holistic overview of your financial performance.

Operating Budget vs. Capital Budget

Operating budgets and capital budgets do coincide, but they aren't the same thing. An operating budget plans your finances around how much it costs to do day-to-day business.

Operating Budget Example:

Suppose your SaaS company anticipates spending $450,000 over the next fiscal year on increased customer support staffing, enhanced cybersecurity protocols, and scaling customer success programs.

To ensure this operational spend aligns with your business goals, you prepare an operating budget that forecasts monthly expenses across departments, compares them to projected revenue, and evaluates whether the company can maintain a healthy profit margin. This budget helps you monitor and adjust spending in real time.

A capital budget is prepared for capital expenditure (CapEx). These are long-term investments in typically high-value assets such as equipment or manufacturing lines. It also covers multi-year timelines.

capital budget example:

Let's say your SaaS company plans to spend $3 million building a proprietary machine learning engine over 18 months, upgrade to a private cloud infrastructure, or acquire a smaller startup to expand your feature set.

To evaluate if it’s worth investing the $3 million, you prepare a capital budget that gives you net present value (NPV)—the expected value of estimated cash inflows resulting from your $3 million investment, discounted at your cost of capital.

While these are the basic differences, there are more key distinctions between the two budget types:

Capital and operating budget work together, but are used for two different use cases.

How Operating Budgets Are Used

Once your operating budget is ready, it becomes a strategic management tool. It’s used to guide decisions, allocate resources, and hold teams accountable. Here’s what operating budgets are used for in practice:

Performance Benchmarking: Operating budgets are used to assess each department’s operational efficiency. Variance analysis helps uncover cost overruns, underperformance, or better-than-expected performance from departments.
Resource Allocation: Budgets clarify how much each team has to work with. This could be a headcount, software spend, or marketing budget.
Forecasting and Scenario Planning: Operating budgets can be used as a baseline for rolling forecasts and what-if analyses. This allows you to be better prepared for contingencies like a revenue shortfall or cost spike and adjust course well in advance.
Strategic Alignment: Operating budgets force prioritization. It connects financial planning with strategic goals, whether that’s investing in R&D, expanding into new markets, or striving for profitability. If you don’t have the budget for all of them, the operating budget can guide you on prioritizing the most impactful goals.
Internal Accountability: Budgets give department heads a clear mandate and spending boundaries. When a department’s spending starts approaching the limit well before the end of the period, your team should jump in and investigate.

Everything Needed For Operating Budgets

Before you start working on your annual operating budget, you need a few numbers handy. The most common components of an operating budget include:

Revenue

Revenue is the trickiest part of the operating budget. While you’re already aware of your cost structure and can control most operating costs to an extent, you have little control over revenue.

All you can do is forecast revenue to the best of your ability. Your forecast will never be entirely correct, but the idea is to be as accurate as possible.

When forecasting, include all types of revenue from operations. For example, if you’re a SaaS company, you’ll likely include:

Subscription revenue
Service fees (for consulting or onboarding)
Usage-based charges (for APIs, cloud compute, etc.)

Variable Costs

Variable costs are directly tied to production or sales activity. The more you sell, the more these costs increase. Some examples of variable costs are:

COGS/COS
Cloud usage fees (in SaaS)
Payment processing fees
Sales commissions
Packaging and shipping
Customer support (when it’s usage-based)

Fixed Costs

On the other hand, fixed costs are relatively constant, regardless of how much you sell. The most common fixed costs include:

Salaries (excluding commission-based roles)
Rent and Utilities
Software Subscriptions
Insurance
Legal, Accounting, or Professional Services

Non-Cash Expenses

Non-cash expenses, like depreciation and amortization, reduce your income, not your cash flow. That’s why, even though they’re not expenses you pay explicitly, they’re included in an operating budget. Along with depreciation and amortization, other non-cash expenses include:

Depletion
Stock-Based Compensation
Unrealized Gains or Losses

Non-Operating Expenses

Most non-operating expenses, such as loan principal repayments or debt interest, are excluded from the operating budget. However, some CFOs may include recurring, predictable expenses like interest payments.

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How to Build an Operating Budget (+ Examples)

Building an operating budget is a collaborative effort. It requires inputs from different departments, including sales, marketing, and even HR. With that in mind, let’s look at the step-by-step process of building an operating budget.

To build an operating budget effectively and successfully, follow these simple steps.

1. Estimate Your Revenue

Revenue is estimated, so you must make a few assumptions about growth and the economy. In all likelihood, your estimate will be wrong. But if you’re doing everything right, your estimate should be in the ballpark of reality.

By “doing everything right,” I mean considering the following factors when estimating revenue:

Historical Data: If you’re a medium- or large-sized business going through the initial high-growth phase, your growth rate will likely be around what it was the previous year (holding all other factors constant).
Market Trends: If you sell an AI agent and see the market for AI agents exploding next year, you can take an optimistic view. On the flip side, you could see little to no revenue growth if you sell legacy software.
Economy: If tariff wars and geopolitical conflicts continue, the economy might slow down, and so will your company’s growth. Otherwise, you might clock in double-digit growth. Again, this requires an educated guess based on the current economic scenario, which is dynamic.
Sales Forecasts: Ask your sales team what they believe they can sell. They’re out there interacting with customers and may have a fair idea of what’s reasonably achievable over the next year.

Remember, your budget or forecasts are not set in stone. When I build a valuation model, I spend quite a bit of time studying the industry and company just to estimate the revenue.

Why?: The only tangible data you can base your estimate on is your historical data. Everything else is based on your team’s experience and, to an extent, intuition.

Example:

Suppose your SaaS company is selling AI agents. Your revenue was $10 million last year, and you expect the revenue to be $15 million this year. The 50% revenue growth is based on favorable market conditions for AI agents, optimism about the U.S. economy, and churn predicted using historical data on user behavior.

When building an operating budget, you only look for a financial blueprint for the next year, not a concrete business value to make an investment decision. This means you can always adjust your budget to align it with reality as time passes.

2. Determine Projected Expenses

After you have your projected revenue, determine your fixed, variable, and non-cash expenses. While these are still estimates and may not be 100% accurate, they’re typically less volatile than revenue.

Variable costs can be calculated as a percentage of revenue. Once you’ve estimated the revenue, you can calculate variable costs since they’re usually a certain percent of revenue.

There may also be semi-variable expenses, such as cloud services, where you pay reserved instance fees and additional on-demand usage fees (for traffic spikes, backups, etc.). The fixed component doesn’t require estimation, while the variable component can be calculated based on the estimated revenue.

Author's Tip

Fixed costs remain unchanged regardless of other factors. Non-cash expenses like depreciation and amortization follow a predefined schedule. You don’t need to estimate them unless you expect additional CapEx during the year, on which you can claim additional depreciation.

Continuing with our example operating budget from before, here's how you would report the estimated costs for the next year:

Expense	Type	Amount ($)
Cost of Sales (40% of revenue)	Variable	6,000,000
Sales Commissions (5% of revenue)	Variable	750,000
Payment Processing Fees (1% of revenue)	Variable	150,000
Customer Support (250,000 fixed base salaries, estimated 1% of revenue for temp staff to support additional chat volume) Note: Total Support Cost = (250,000 + 150,000)	Semi-Variable	400,000
Salaries	Fixed	1,000,000
Rent	Fixed	350,000
Insurance	Fixed	50,000
Depreciation	Non-Cash	175,000
Interest	Non-Operating	125,000
Total Estimated Costs	-	9,000,000

3. Compile the Information

Now, you should have all the information to draft your operating budget. Here’s an example of a finished budget template with the necessary costs:

Particulars	Amount ($)	Amount ($)
Revenue		15,000,000
Cost of Sales (40% of revenue)	6,000,000
Sales Commissions (5% of revenue)	750,000
Payment Processing Fees (1% of revenue)	150,000
Customer Support (250,000 fixed base salaries, estimated 1% of revenue for temp staff to support additional chat volume) Note: Total Support Cost = (250,000 + 150,000)	400,000
Salaries	1,000,000
Rent	350,000
Insurance	50,000
Depreciation	175,000
Interest	125,000
Total Estimated Costs		(9,000,000)
Estimated Operating Income		6,000,000

Author's Tip

Remember to include any additional notes you may have on your costs in your report. Not only does this help with informed decision-making, but it also builds transparency and trust with your stakeholders and executive leaders.

4. Revise and Present Findings

Finally, you’re ready to send the draft budget to department heads and stakeholders for review. Ask them to look for gaps, overly optimistic assumptions, or under-budgeted categories. Based on their feedback, iterate and finalize.

Once you’ve factored in everyone’s feedback, analyze the budget and look at other estimates, such as your cash position and CapEx needs. The budget is not practical if you’ve budgeted to spend $1 million on marketing but expect to have only $500,000 in cash.

After you’ve tied those loose ends:

Create a clean, executive-level summary (preferably with charts and graphs where relevant)
Highlight key assumptions (growth rate, churn, etc.)
Offer scenario analysis (base case, best case, and worst case)

The business environment changes fast for industries like SaaS, so it’s best to maintain a rolling budget to stay agile. This allows you to factor in evolving conditions into your budget, helping you align your budget with reality, rather than only at the end of the fiscal year.

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Top 5 Benefits Of Operating Budgets

Operating budgets are beneficial from a financial standpoint, but they also offer logistical benefits as well. Here’s what you get for all that time you spend estimating figures and drafting a budget:

Improved Financial Control: Operating budgets set spending boundaries and revenue expectations. This gives finance leaders a clear framework for monitoring financial activity, minimizes surprises, and helps enforce discipline across departments. It also allows you to flag overspending early and tighten controls dynamically as needed.
Better Decision-Making: You make better financial decisions when you have a structured view of revenue and expenses, as well as real-time data from your accounting software to evaluate trade-offs and mitigate risks. For example, if last quarter’s marketing performance was underwhelming but customer success is driving expansions, you can reallocate resources to maximize ROI.
Enhanced Performance and Accountability: Budgets clarify expectations. When your teams have clear financial targets, they’re more likely to track metrics, justify investments, and stay aligned with strategic priorities.
Cash Flow Planning: An operating budget helps forecast when cash comes in and goes out. This makes it easier to manage working capital and avoid liquidity problems. It’s especially useful for seasonal businesses or companies expanding to new markets.
Promotes Continuous Improvement: Comparing actual results to budgeted figures (called variance analysis) gives insights into what’s working and what’s not. It also improves your forecasts and helps you build a learning loop.

No process is without pitfalls. Operating budgets, while important, do come with a few complexities. Here are some challenges I’ve encountered in my career:

Forecasting Difficulty

Forecasting revenues is equal parts art and science. Market volatility, competitive moves, customer churn, or unexpected costs make predicting revenue challenging.

Example:

Your SaaS company forecasts $5 million in ARR growth this year based on historical sales data, current pipeline strength, and a planned extension into the mid-market segment.

Your assumptions include 10% churn and a 45-day sales cycle. But what if a key integration partner sunsets its product, leading to a spike in cancellations and a churn of 20%? Or what if macroeconomic headwinds make procurement teams more cautious, dragging the sales cycle out to over 70 days?

To maximize the accuracy of forecasts, involve internal experts who have been in your industry for a while and know your company well.

Lack of Cross-Functional Alignment

Operating budgets built in a silo are destined for failure. If sales, marketing, product, and operations aren’t aligned on goals, assumptions, or timelines, the budget becomes more of a political battleground than a strategic guide.

Teams may resort to sandbag projections and feel the need to compete for limited resources rather than collaborating to achieve overarching goals. Involve department heads early and often to make your budget more collaborative and ensure they’re aligned on goals.

Data Integrity

Your budget is only as good as the data you used to estimate its figures. Inaccurate historical data or assumptions based on outdated figures lead to poor projections and decisions.

This is more of a problem for companies that still rely on manual processes or inconsistent data sources than those using modern accounting systems. Consider investing in a digital accounting system if you’re currently on a legacy system or use manual methods.

Time- and Resource-Intensive

Building an operating budget takes time and effort, especially in companies with multiple business units and complex cost structures. The process may be slow and often bureaucratic. In some cases, business conditions may even change by the time the budget is finalized.

Example:

During the budgeting process for a SaaS business, strategies can shift quickly. If new data shows content marketing is outperforming paid ads, teams may need to reallocate funds and adjust revenue forecasts mid-cycle. These changes can disrupt timelines if workflows aren’t streamlined.

Define a lean workflow and communicate responsibilities to all participants before starting the process to ensure things move quickly and your budget is ready within a few days.

Best Practices for Operating Budgets

Here are some best practices to follow when preparing an operating budget:

Collaborate Across Departments Early: Engage department heads from the start so they have enough time to share their inputs. This also helps prevent last-minute surprises and earn buy-in from those responsible for executing the operating budget.
Build in Contingencies: Assume the unexpected will happen because it often does. Use scenario models for volatile cost categories like cloud infrastructure and supply chain. Consider using a rolling forecast alongside your annual budget for more agility.
Communicate Transparently: Make sure everyone, from execs to department leads, understands the reasoning behind every budget decision. A transparent process fosters a culture of fiscal ownership.
Don’t Over-Rely on Historical Data: Use historical data as a starting point. The past doesn’t necessarily repeat itself. Use insights from internal experts on what each line item may look like next year based on historical data and external factors to make your estimates more attuned to reality.

Operating Budgets With Software

Excel spreadsheets won’t get you far in the modern world. Budgeting and planning software can simplify the process by automating parts of the workflow and integrating with other tools in your tech stack to sync data across systems.

Modern tools like Workday Adaptive Planning, Anaplan, and Planful offer features like:

Real-time collaboration across departments
Version control and audit trails to reduce errors
Scenario modeling to test assumptions quickly
Dashboards and analytics for faster decision-making
Seamless integration with ERP, CRM, and other systems

If you’re about to prepare an operating budget, start by investing in a budgeting and planning system, like the ones below:

1. Puzzle.io — Best for automated bookkeeping
2. Anaplan — Best for large enterprise scalability
3. Prophix — Best for automated reporting
4. SAP Analytics Cloud — Best for data integration
5. OneStream — Best for unified financial planning
6. Centage — Best for small business flexibility
7. insightsoftware — Best for financial consolidation
8. PlanGuru — Best for startups
9. CCH Tagetik — Best for regulatory compliance
10. Board — Best for visual analytics

Gain More Control With an Operating Budget

An operating budget is a strategic tool that establishes accountability, guides decisions, and keeps the business aligned with its goals. Instead of just preparing an operating budget to “get it over with,” use it to control your business and steer it towards higher profitability.

Much of our discussion in this guide was geared towards SaaS businesses. However, the fundamentals of an operating budget are the same for any business—collaborate early, forecast realistically, review often, and use technology, and you’ll be able to prepare an operating budget with little friction.

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