Budgeting is one of the most critical financial management activities when it comes to a small business's day-to-day operations. The master budget for a business is an overall financial planning document, and consists of two budgets: The operating budget and the financial budget.

The operating budget for a business is a forecasted, or predicted, financial statement of all the revenue and expenses it expects during a specified time period like a quarter or a year. The operating budget is usually broken down by category of revenue for each product the business sells. It is also broken down by types of expenditures it makes regarding every product. Most firms further break down their operating budgets by fixed and variable costs.

The operating budget uses forecasted numbers in the different budgets, or schedules, that comprise it. These forecasts are based on historical activity, input from the sales force, and other sources. The result of the development of the operating budget is the pro forma, or forecasted, income statement for the firm for the specified time period.