An operating budget is a forecast of the revenues and expenses expected for one or more future periods. An operating budget is typically formulated by the management team just prior to the beginning of the year, and shows expected activity levels for the entire year. This budget may be supported by a number of subsidiary schedules that contain information at a more detailed level. For example, there may be separate supporting budgets that address payroll, the cost of goods sold, and inventory. Actual results are then compared to the operating budget to determine the extent of any variances from expectations. Management may alter its actions during the year to bring actual results into line with the operating budget.
An operating budget tends to become less accurate for periods further in the future. To offset this issue, some organizations routinely update their budget based on the latest available information.