How to make a small business budget

Why is a small business budget important?

A successful small business budget does more than just account for day-to-day transactions and business costs; it helps your business withstand potential pitfalls, maximizes your business’s efficiency, helps you estimate profits, and prepares you for future opportunities and investments. That said, a small business’s budget success wholly depends on how well you design it. When crafting any budget, a business owner should stay cognizant of its financial health—including the good, the bad, and the ugly.

Five key components of a small business budget

By taking a realistic 360-degree view of your business landscape, you can pave the best path toward achieving your financial goals. Before you craft a budget, grasp the these five fundamental steps.

1. Forecast revenue

First, understand how much money your business brings in. Evaluate all your revenue streams. How much money are you making on a regular basis, and is this income stable? Are there quarters or certain periods you make more revenue? Take your time to earnestly evaluate your revenue streams to create a healthy foundation for your budget.

2. List fixed costs

Fixed costs are constant, regardless of your business activity. Rent and lease costs, loan repayments, utility bills, and insurance payments all fall under this bucket. These costs are easy to account for, just make sure not to overlook anything.

3. Estimate variable costs

Estimating variable costs is a tricky process, but it’s essential for successfully maneuvering your business toward a profitable year. Variable costs fluctuate. Seasonality, emergencies, and other factors can manipulate fluctuating expenses. Variable costs are quintessential to determine your profit margins, so estimate them appropriately. Some variable costs include direct labor, commission, raw material costs, and shipping/freight costs. The variable costs you must navigate vary based on the nature of your business. Regardless of the industry, accurately budget variable costs so they don’t come back to bite away your business’s financial health.

4. Account for one-time expenses

Account for one-time expenses that spring up throughout the year so you aren’t blindsided by an unexpected but necessary bill like purchasing new hardware or upgrading your computer software. Prepare for the unexpected.

5. Create a profit and loss statement

A profit and loss statement summarizes a business’s financial health during a certain time period—accounting for revenues, costs, and expenses. Typically, they’re conducted annually or quarterly. By creating a profit and loss statement, you can see the net income of your small business. On a year-to-year basis, this statement helps you create business operating plans for each budget period. Analyze the profit and loss statement to identify margins for profitability over time so you can craft a healthy budget.

Grow a business

Use free apps and tools from microsoft for your small business and side gig.

Learn more

How to create a budgeting strategy

Outside of the five basic elements, additional factors influence a healthy business budgeting strategy as well. Technology, regular monitoring, and team involvement can all impact and improve your budget. Modern software can automate components of the process. Regular monitoring ensures you are on top of any changes to your business. Team involvement offers new perspectives and insights you may have overlooked.

By including all these elements, you can create an effective budgeting strategy to cultivate a successful business environment. For more insights and strategies to improve your business’s financial health, learn more budgeting tips.