A budget is a document that projects a business’s future sales, costs, profits and cash flow. It’s a vital business planning tool. Without a budget, it will be difficult for you to know how well (or poorly) your business is doing.
Business budgets help you:
- Project start-up costs if you’re starting a new business
- Determine how much money you need to earn to break even and earn a profit
- Estimate your business’s cash flow so you know whether you can meet expenses and fund new projects
- Work out what changes you need to make to have a profitable business by comparing budgeted vs actual performance
- Predict slow months so you can plan for them
- Identify leftover funds you can reinvest
- Obtain a business loan from a bank or other from a financial institution, or equity funding from investors
How to create a budget
Your budget should cover at least one year and include monthly income and expense projections.
Here are six steps to creating a small business budget.
Step 1: Gather financial information
To create a budget, you must project future revenue and expenses. The best way to do this is to look at your business’s past performance.
If you have an established business, look at your most recent financial statements. These statements should include an itemised list of the fixed and variable expenses you incurred during the year. If you lack such statements, go through your income and expense records and bank statements for the prior year.
Use these numbers as a starting point to project your revenue and expenses for the next year. You’ll probably need to massage these numbers. Do you expect your business to improve? You may need to increase your revenue projections if you expect to add new customers or clients, or you plan to raise your prices.
If you’re starting a new business, you’ll need to do some research. Gather financial information for companies that are similar in both in size and type. There are various ways to do this:
- Ask colleagues who have established businesses for help – what did they earn during their first year?
- Use the practical knowledge you gained working in the field for other businesses
- Perform market research
- Factor in how many clients or customers you’ve already lined up and how much more business you can reasonably expect to attract
Armed with this information, make your best estimate of what you’ll earn. Don’t be overly optimistic. But, remember, this is only an estimate.
Step 2: Add up all your revenue sources
How much money do you expect your business to earn? Revenue sources can include:
- Hourly earnings
- Product sales
- Investment income
- Income from asset sales, and
Step 3: Determine fixed costs
List and add up all your fixed costs. Fixed costs are expenses that remain the same every month. Common examples of fixed costs include:
- Office rent
- Leased furniture and equipment
- Mobile phone
- Bank fees
- Accounting and payroll services
- Business vehicle leases (or loan payments if for purchased vehicles)
- Business loan payments
- Business insurance
- Business licences
- Subscriptions and dues
- Employee salaries and benefits
- Property taxes
- Website hosting expenses
Step 4: Identify variable expenses
Unlike fixed costs, variable expenses can change from month-to-month. You can increase or decrease these expenses, depending on how well your business is doing. For example:
- Raw materials (only applicable when producing goods for sale)
- Delivery costs
- Utility costs – including electricity, gas and water
- Employee salaries and benefits
- Independent contractor payments (for example, payments to commission outside salespeople)
- Advertising and marketing costs
- Maintenance and repair of equipment
- Legal services
- Education and training
Step 5: Account for one-off expenses
If you anticipate incurring one-off expenses during the next year, list them here. These may include:
- Business retreats, conventions or conferences
Step 6: Put it all together
Subtract your total projected expenses from your total income to see how much profit you expect to earn each month and at the end of one year. Then, throughout the year, track how much money you collect and spend each month and compare it with your budget projections. Shortfalls should raise an alarm. You may have to reduce your expenses if you can’t increase your revenues.
On the other hand, if you earn more profit than projected, you may be able to expand your business. For example, you can increase what you spend on variable expenses like stock or pay yourself more.
Helpful budgeting tools
There are many free tools you can use to help create a budget for your business.
Budget templates: The easiest way to create a budget is to use a budget template. There are hundreds of budget templates available for free online. Templates also come with spreadsheet software like Excel. You can likely find a template designed explicitly with income and expense categories for your type of business. All you have to do is fill in the blank spaces with your estimates.
Budget software and apps: Your business accounting software may have budgeting functions. For example, you can create a business budget with QuickBooks. There are also stand-alone budgeting apps and software applications.
Create your own spreadsheet: If you’re a true do-it-yourselfer, you can create your own budget spreadsheet with Excel or other spreadsheet software. It’s actually pretty easy. Here’s an example of a simple budget spreadsheet. You need four columns:
- Your income and expense categories
- Your budgeted amounts
- The actual amount spent or earned, and
- The difference between the planned and actual amounts