Building Financial Models with Microsoft® Excel®: A Guide for Business Professionals, Second Edition

Chapter 2. Operating Budget—Assumptions, Sales, and Collections

The Operating Budget, also known as a "profit plan," focuses on a company's Income Statement and its supporting components or "schedules." While Chapter 1 provides an overview of the concept of a Master Budget, this chapter covers the specific steps involved in building the sales components of an Operating Budget from the ground up. Chapters 3 and 4 provide detailed coverage of the steps involved in building the cost components of an Operating Budget. Figure 2.1 highlights the separate sales-oriented components of the Operating Budget.

Preparing an Operating Budget is the first step in the process of building a Master Budget. The preparation of an Operating Budget is a sequential process—it is critical to follow each step outlined below in the order presented. Moreover, the preparation of a financial budget in Chapters 6 and 7 and the consolidated financial statements in Chapter 8 build on the work in this chapter.

NAPAVALE—BACKGROUND INFORMATION ON EXAMPLE COMPANY

I will use a fictitious company named "Napavale" to illustrate the process of building a financial model. Napavale develops, markets, and sells advanced flat-screen computer monitors directly to consumers. These products are sold exclusively through a direct channel of distribution—the monitors are not sold through electronics stores or resellers, for example. Napavale offers customers several ways to purchase its monitors: through a mail-order catalog, over ...