A budget serves as the financial roadmap for any small business, offering direction and control over its financial resources by providing a clear overview of revenue and expenses.
It can also act as a safeguard, helping to prevent overspending and ensuring that the business remains financially stable, especially during periods of economic uncertainty or unexpected expenses.
Why do you need a business budget?
Before we reveal the steps of small business budgeting, it’s necessary to know why small business budgeting is important. According to Harvard Business School, budgeting plays a key role in business success. Here are some of the reasons you need a budget.1
- Budgeting is tied directly to organizational goals. Whether your goal is to improve client retention, expand into a new market, or attract additional financing, your budget can help guide you.
- Your business budget ensures that the resources you need are available when you need them.
- A budget is part of any business plan and will be used by prospective lenders and investors to evaluate your company.
- Your budget is a tool for helping you prioritize spending, allocate funds as needed, and stay within your means.
Your budget should be a living document. Business flexibility is necessary because it’s impossible to know when you’ll be met with a challenge that requires you to rethink your spending.
How to create a budget for a business
Creating a budget for your business might seem complicated, but it doesn’t need to be stressful or time-consuming. Here are 5 steps to follow to create your business budget.
Step 1: Choose a budgeting method
Small business owners should choose a budgeting method that aligns with their financial objectives, organizational structure, and management style. These include:2
- Zero-based budgeting requires you to account for every penny that comes into or flows out of your business, so the total will always be zero.
- Incremental budgeting is the simplest form of budgeting. It involves using last year’s budget as the basis for a new budget with an incremental increase.
- Activity-based budgeting starts with your revenue goals and works from the top down. You’ll use your goals to determine how much you need to spend to achieve them and calculate your budget accordingly.
- Value proposition budgeting focuses on determining whether each expenditure in your budget delivers value to your company.
You’ll also want to consider how much input your employees should have in the budgeting process, if any. Some business owners may prefer to do it themselves, while others see the benefit in getting input from managers and employees before they set budget goals.
Step 2: Project your revenue
Revenue projections serve as the cornerstone of financial planning when creating a business budget. By utilizing historical data and market research, businesses can develop realistic sales forecasts that form the basis for revenue projections in the budget.
Beyond sales, it’s crucial to include other sources of income when projecting revenue. This may encompass additional revenue streams such as investments, grants, or royalties. Businesses should identify and quantify any supplementary sources of income that contribute to their overall revenue. For instance, income from investments or interest-bearing accounts can provide a steady stream of passive income, while grants or subsidies can offer one-time or recurring financial support.
By incorporating these diverse revenue streams into the budget, businesses can ensure a comprehensive and accurate representation of their financial outlook, enabling better decision-making and resource allocation.
Step 3: Estimate expenses
Understanding and anticipating expenses allow businesses to maintain financial stability, avoid cash flow crises, and allocate funds strategically to support key business objectives. There are two types of expenses to include: fixed and variable.
- A fixed expense is a regular and consistent cost that remains relatively stable from month to month, regardless of the level of business activity or changes in revenue. For example, a fixed expense could be rent for an office space, insurance payments, business loan or equipment leasing payments, and employee salaries.
- A variable expense is a cost that fluctuates. Unlike fixed expenses, which remain relatively stable, variable expenses can increase or decrease depending on factors such as production volume, sales volume, or seasonal variations. For example, a variable expense could be utilities that vary based on usage (such as water or gas), commissions or bonuses tied to sales performance, shipping costs, or marketing expenses like advertising or promotions.
Step 4: Subtract estimated expenses from projected revenue
The next step is subtracting your fixed and variable expenses from your projected revenue. If you end up with a positive number, you’re projecting a profit for the month. If the number is negative, you’re projecting a loss.
If your projection is negative and shows a loss, you should revisit your spending or be prepared to take on some debt. It’s not uncommon for small business owners to take on some debt but be wary of racking up too much.
Step 5: Review your budget and adjust as needed
Reviewing and adjusting your budget as needed is essential for maintaining financial health and adaptability in response to changing circumstances, such as:
- One or more of your suppliers increases their prices, and you must raise your prices to maintain your profit margin.
- Inflation drives up the cost of raw materials.
- Your utility costs increase due to unexpectedly cold or hot weather.
- The interest rate on your loan rises or falls based on market conditions.
- You land a new contract that dramatically increases your monthly revenue.
We recommend revisiting your budget regularly, even if your revenue or expenses have remained largely the same.
Business Budgeting Software
It’s common for small businesses to use business budgeting software to help them crunch the numbers and avoid overspending. Accounting software often includes a budgeting option.
Business budgeting software can help small business owners streamline the budgeting process, enhance financial management, and promote informed decision-making. With budgeting software, small businesses can automate tedious tasks such as data entry, calculation, and report generation, saving time and reducing the risk of errors.
These platforms often provide intuitive interfaces and customizable templates, making it easier for business owners to create, track, and manage budgets tailored to their needs and goals. By providing real-time insights, business budgeting software helps empower small business owners to make data-driven decisions, optimize resource allocation, and navigate financial challenges with confidence.
Small business budgeting tips
Here are a few small business budgeting tips to consider as you create a business budget.
- Keep meticulous records of all business expenditures, no matter how small. This practice helps identify areas where costs can be reduced or optimized.
- Set aside a portion of your budget for unexpected expenses or emergencies. Having a contingency fund ensures financial stability during challenging times.
- Negotiate favorable terms with suppliers and vendors to lower costs. Explore discounts, bulk purchasing, or payment terms that align with your cash flow.
- Stick to your budget and resist the temptation to overspend, even during periods of increased revenue. Maintain financial discipline to achieve long-term financial goals.
- Consider consulting with a financial advisor or accountant for guidance on budgeting strategies, tax planning, and financial management best practices tailored to your business needs.
Most importantly, remember that your budget is a tool. Some business owners mistakenly consider budgeting a constraint. But, when used properly, a small business budget can be the key to achieving your most important business growth goals.
Woligo has your back
Woligo is here to help small business owners navigate the complexities of working for themselves. Knowing how to create a business budget is necessary for every business owner, whether you’re launching a start-up or trying to scale your company.