Overview

Operational expenses are expenses that are required in order to maintain the current level of operations in the short term. (see income statement) Budgeting for operational expense typically proceeds in one of the following ways.

• Forecast the Expense - that is, the firm simply forecasts what the expense will be. This may involve a simple time series model, or possibly a straight forward scaling of costs proportional to forecasted demand.
• Align the Budget to Strategy - typically involves formulating a strategy that specifies the products and services that are intended to be sold over the coming year. This may involve changing the current mix to something that is more profitable. Given the desired position, the costs that are required to produce the intended level of product is then calculated and used as the budget. This may require some form of cost allocation in order to understand the expenses required for each individual product or service.

Inflation

Inflation is a general rising of the price of goods and services (including wages) in an economy. As a general rule, a firm needs to account for inflation when forecasting operational expense.