Operating Budget – Service

Learning Outcomes

  • Prepare an operating budget for a service company

Service Company Budgets flowchart. At the top is the sales budget, which has an arrow pointing to the SG&A budget. The sales and SG&A budget boxes are blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There is also an arrow pointing from the SG&A budget to the cash budget.

Service firms use the same budgeting process as other firms, but it’s usually simpler since there is no product for which to account. Often, a service company that has steady, predictable business will adopt an incremental approach to budgeting, basing next year’s budget off the current year.

To illustrate, assume Wendy Weathers’s accounting firm projects the following changes to last year’s results:

  1. Business volume will increase by 5%.
  2. Support staff salaries will increase 3% and so will taxes and benefits.
  3. Rent will go up by $3,150 according to the lease agreement.
  4. Other expenses will remain the same.
  5. Income taxes will be 30% of net income.
Wendy Weathers Company
Description Prior Year BUDGET Calculation
Subcategory, Budget
Prior YearDouble line BUDGETDouble line CalculationDouble line
Sales Single Line$450,000 Single Line$472,500 450,000 * 1.05
Subcategory, Less Expenses: Single Line Single Line
      Support Salaries $125,000 $128,750 $125,000 *1.03
      Payroll Taxes and Benefits $45,000 $46,350 $75,000 * 1.03
      Supplies Expense $5,000 $5,000 no change
      Rent Expense $120,000 $123,150 Rent increase
      Miscellaneous Expense $15,000 $15,000 no change
Total Expenses Single Line$310,000 Single Line$318,250 sum of all expenses
Income from operations Single Line$140,000 Single Line$154,250 Sales – Expenses
Less: Income Tax (30%) ($42,000) ($46,275) Inc. from operations x 30%
Projected Profit Single Line$98,000 Single Line$107,975 Inc. from operations – income tax
Single Line Single Line

 

She could also use zero-based budgeting by projecting the volume of work she expects and assigning revenue to that volume. For instance, if she intends to increase her fees from $225/hour to $250 and wants to limit her billable hours per week to 40, taking two weeks off, she would forecast revenue as 50 weeks * 40 hours/week * $250/hr =  $500,000.

In addition, she may want to create the budget on a monthly basis, since workloads for an accounting firm may be heavier during tax season and lighter during the summer, depending on the kind of work the firm is doing.

Now check your understanding of the operating budget for a service company.

Practice Question