How to Build an Operating Budget for Your Small Business When You Sell Products
One way to build an operating budget is to determine the direct and indirect cost per unit of product. Once you calculate the total cost per unit, you could add a margin to determine your sales price. You can calculate the number of units you can produce each month based on your production capacity in terms of time and resources.
Other People Are Reading
Instructions
-
-
1
Determine what it takes to make the product in terms of the direct costs of raw materials, supplies and labor. Prepare a recipe for the product, identifying the ingredients in terms of quantities and prices to calculate how much it will cost you to make each unit of product.
-
2
Calculate the monthly overhead to be allocated to the cost of each unit. Take into account all your indirect costs, including indirect labor -- administrative and management salaries -- utilities, insurance, maintenance, depreciation and any other overhead expenses. If you have some history, calculate your average overhead expenses over the past few months. If you are just starting, use as much objective information as you can find -- quotes, research, information from comparable businesses -- to estimate monthly overhead expenses.
-
-
3
Based on the time it takes to produce each unit and your production capacity -- available hours per month and resources -- calculate how many units you can produce each month.
-
4
Divide the total monthly overhead cost by the number of units you can produce each month to determine the indirect cost of each unit. If you have more than one product you could assign a weighting factor. For example, products with a higher direct cost could absorb more of the overhead expenses.
-
5
Add the direct cost to produce each unit and the overhead allocation to come up with the total cost of each unit.
-
6
Multiply the total cost per unit -- direct costs and overhead allocation -- by the number of units you can produce and sell each month to determine your monthly cost of sales.
-
7
If your sales price is a percentage mark up over cost, take the total cost per unit as determined above and add your markup. Multiply the sales price per unit by the number of units you can sell in a month to determine your monthly sales revenue.
-
8
Subtract your total budgeted cost of sales for the month from your total budgeted revenue to determine your budgeted gross operating income for the month.
-
1
Tips & Warnings
Some costs will have a direct and an overhead component. For example, part of your electricity bill will be for the lights in your facility, which doesn't depend on the level of production, and part may be for operating equipment, which depends on how much you produce. Instead of allocating overhead expenses to the cost of each unit of product, you could budget the cost of sales based only on direct costs -- raw materials, supplies and labor -- and budget overhead expenses as monthly totals.
There are various market forces at work that can affect your selling price, such as the prices your competitors charge for the same or a similar product, demand for the product, overall economic conditions and conditions in your area.
