Business budgets are key for any small business to measure its revenues and expenses against financial expectations. A business budget can be a powerful tool for cash flow and for comparing real-world numbers against projections. Business owners can assess whether their company is on the right financial track, coming up short, or experiencing a surplus.
With a good business budget, any business owner can make informed decisions about taking on new business expenses, or pivot in the face of unexpected costs. The discovery that a particular month, quarter, or year brought a budgetary shortfall, business owners might elect to put off a new hire or a major equipment purchase.
Creating a useful business budget is an important skill for small business owners to develop. Here’s a step-by-step guide to the business budgeting process.
How Does a Business Budget Work?
A sound budget is based on historical data, specifically revenue, expense, and cash flow numbers from previous months and years. Based on these numbers, small businesses can make projections for the future, allowing for wise decision-making. This can cut both ways. If there have been a few lean months and further scarcity is projected, businesses will look for any opportunity to cut their variable expenses.
But if business is booming, it may be time to invest in new personnel or a new location. Budgets help businesses know when it’s a wise time to spend money or when to tighten the belts.
Creating a budget from scratch can be a little daunting, but actually, most small businesses already have the tools they need to get started. Most, if not all of the historic data you need can be found in your small business accounting software.
Quickbooks provides great tools for calculating business budgets, including options to distinguish estimated income and expenses from every part of the business. Budget vs. Actuals reporting is another great tool for seeing actual numbers alongside projections.
For business owners who desire more advanced features, the best budgeting software has cash flow forecasting and estimates for fixed costs (such as LLC annual fees) vs. variable costs. Businesses that long for a simpler approach can find budget templates online.
Why a Business Budget is Important
Whether you’re talking about a budget for personal finance or for estimating business performance, the advantages are hard to deny. Simply put, a good budget will let you to take a long view, casting an eye past today, and even past this calendar year. A budget provides an incredible tool for guiding your company toward long-term growth.
A good business budget can help small businesses:
- Optimize their own efficiency.
- Establish a strategic plan for meeting financial goals.
- Identifying surplus funds that can be invested in business growth.
- Forecast slow months to ensure cash flow and avoid the business going into debt.
- Make wise decisions about how to make the business more profitable.
- Evaluate opportunities to reduce fixed and variable costs, ranging from shipping costs to bank fees.
With clear data to guide your spending, you can make sure to allocate business resources to the right places. A budget can allow small businesses to run in a more efficient and financially prudent manner.
How to Create a Business Budget in 6 Steps
Long-established businesses have an advantage when developing their business budget, simply because they have more historical data. Small business startups will need to research similarly-sized companies in their industry, drawing more general conclusions about potential fixed costs and variable expenses. Beyond that, here are 6 basic steps for how to create a business budget.
1) Assess your revenue.
A good budget should take into account both income and expenses, typically in that order. To start, take stock of your business, making note of any and all revenue sources. By adding those revenue sources together, you can get a basic sense of how much money you bring into your business on a monthly basis.
Remember, the larger the data set you’re working with, the better. Consider revenues not just from the past month but from the past 12 months or even longer if you can.
As you put together this information, be mindful of any patterns indicating how your revenue ebbs or flows over time. Your company might have a lower projected revenue during Q1. You may experience a summer slowdown, or a dip in sales right after the holiday shopping season. Know which times of the year tend to be leaner, and plan accordingly.
Using this historic data, make revenue projections for the upcoming months. That’s a starting point for any good small business budget.
2) Subtract fixed costs.
You’ll also want to project your costs. Start with the reliable and predictable ones, also known as your fixed costs. These may be daily, weekly, monthly, or annual expenses. What defines them is that they remain consistent no matter what kind of revenue your small business is generating.
There are plenty of examples of fixed costs, but some of the most common ones include employee salaries, rent, insurance, and property taxes.
Once you have identified all of your small business’ fixed costs, subtract them from your revenue.
3) Subtract variable expenses.
There are some expenses that aren’t consistent or predictable. These are variable expenses. These costs may fluctuate according to the output or production of your small business.
These expenses also need to be subtracted from your overall business revenues. Some examples of variable costs include raw materials costs and the salaries of hourly employees. Your salary draw as a business owner may also fall under this category if you base your salary on profit. YouTube marketing costs can also be added under this category, as can SEO expenses and other marketing investments.
Knowing your variable costs is important because, during lean months, you’ll want to stop spending money however you can. But during boom times, you may actually want to invest more money in these areas for long-term business growth.
4) Set aside a fund for unexpected costs.
It’s also important to set aside some business funds for any unexpected expenses that arise. Think of this as an emergency fund.
Having these funds set aside is a critical component of business finance. It provides a cushion for an unexpected equipment breakdown, or when a huge batch of product gets ruined or damaged. Having some money set aside for these things can prevent debt, excuses to borrow money, or the need to get an expensive business loan.
5) Determine your profit.
By this point in the process, you should know your projected revenue and your projected expenses, both variable and fixed. Subtract the expenses from the revenue to determine your business income.
If this leaves you with a positive number, that means your small business is projecting a profit for the time period in question. A negative number means a projected loss, which isn’t necessarily the end of the world. Many small companies don’t make a profit every month or even every year, and a good budget can provide a pathway forward to profitability.
It’s also important to compare your projected profits with previous/historic profits, simply to make sure that the number in your business budget is realistic.
6) Finalize your business budget.
Finally, take stock of your projections. Are the profits you’re projecting sufficient? Does your business need to cut back on some of its spending? And, what kinds of goals should you set? A good business budget provides an excellent opportunity to establish goals for the coming months or years. Be sure to set goals that are realistic.
Remember that your business budget provides ongoing insight into the financial health of your business. Come back to your budget regularly, taking stock of any changes to payroll costs, operating costs, or other pieces of financial data.
Conclusion: Creating a Business Budget
Successful business owners are intentional about their financial plans. They use historic data to predict future revenue, to categorize existing business expenses, and to make sure they are on the right track toward sustainable growth.
It’s important to go beyond a simple profit and loss statement, instead developing a full business budget. While knowing how to create a business budget may seem daunting, it’s actually something that can be achieved with some basic tools and the 6 simple steps above.
FAQs About Business Budgets
What is a business budget?
A business budget is a financial plan made from historic data points, including revenue sources and operating expenses. The point of the budget is to use these historic data points to predict future revenue and expenses, allowing the business owner to make informed decisions about spending, saving, and investing.
As the year progresses, business owners may compare their actual numbers with their budgeted ones. This is a great way for businesses to hold themselves accountable for their own financial activity, and to know when it’s a good time for major one-off expenses like website development. Budgets can also be invaluable tools for setting smart, realistic, and measurable financial goals.
What should a business budget include?
A business budget should include all known sources of income, all expenses (both fixed and variable). All the costs are subtracted from the total revenue number, which provides a projection for business profitability.
And a budget may include some money set aside for contingency funds. Business finances may be earmarked for any urgent equipment replacement needs. The emergency fund can be a critical aspect of business budgeting.
How do you create a basic business budget?
Creating a small business budget takes some historic data points, including revenue and expenses. The revenues are added together, and then all expenses are subtracted. The number that’s left is the projected profitability for the company.
These data points can often be gleaned from accounting software. More advanced business budgeting tools are also available for companies that want to take a more granular approach. For those favoring simplicity, it’s easy to find a basic business budget template available for download.
What are the 6 steps in creating a business budget?
The 6 steps in creating a business budget are:
- Assessing existing sources of business revenues.
- Subtracting fixed costs.
- Subtracting variable costs.
- Setting aside an emergency fund (also known as a contingency fund).
- Determining the projected profit level.
- Finalizing the budget (ensuring the projected profit number is credible and functional).
In addition to these steps, the small business budget process should also involve goal-setting, and a regular review to ensure the company is on track with its financial decisions.
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.