Lesson: Operating Budgets

Instructor: Nick Palazzolo

In this lesson, Nick Palazzolo, CPA, dives deep into the operational backbone of a company's financial planning process: the operating budgets. Starting with the sales budget, Nick details its importance as the cornerstone of all subsequent budgets, highlighting how it's based on sales forecasts and influenced by historical patterns, market conditions, competitor actions, and planned pricing adjustments. With clear explanations and dynamic visuals, he showcases how changes in the sales budget ripple through related budgets, like production and SG&A, and affect cash flow projections. By exploring the interconnectivity of various budgets and their impacts on financial health, Nick makes graspable how a well-crafted operating budget informs a myriad of business decisions.

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Now we're going to go down into each type of budget and talk about them. I've got some actual projections, some actual graphics of budgets, and I'll show them to you in a nice dynamic way. But we're going to talk about them, we're going to see where they fit into the process. We're going to talk about this all. And they're all important to a company, right?

They're all super important, this sales budget. And these are all relatively straightforward. It's based on the sales forecast. Hey, we expect to make a million dollars and we expect to sell 10,000 units, essentially the same as a sales forecast. What does it take into account?

Well, it takes into account historical sales patterns. It's pretty straightforward, right? We think during the holiday times, during Christmas, we're going to have increased sales, so we'll probably bump up the sales then. Macroeconomic factors. Oh, there's a recession hitting.

We're probably going to have less sales. Competitors, competitors just launched a product. We're going to probably sell less. Future estimates right here. We expect in the future that we're going to sell more for X reason.

Price changes. We increase the price of something, it'll probably sell less. We decrease the price, sell more. It's a little supply and demand taking a pull from economics, advertising, marketing changes. Hopefully the more you advertise the more you market, hopefully the more you sell and product changes.

If we make a better product, you would hope it would sell better. There the sales budget. This is the foundation of the entire budget process. Just think about that. It makes sense, right?

A lot of costs are variable and if costs are fixed, well, then you don't really have to think about that too hard. They're just pretty fixed and nothing to

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