Creating a small business budget: a step-by-step guide

Creating a budget helps you plan ahead and make strategic decisions, such as when to expand and when and where to cut back. Here’s how.

What is a business budget?

A business budget sets out your company’s key financial data. This includes predicted income and expenses, and expected profit or loss based on your predictions.

A business budget is an integral part of writing your business plan, and gives you a clearer picture of your company’s financial status. This enables you to make the right decisions to keep your business thriving.

Having a detailed budget can also help you win funding from investors and qualify for business loans and other types of business finance.

Find out more with our five-minute guide: What is budgeting in business?

How can I create a small business budget?

Creating a business budget for the first time can be daunting. But it’s not difficult, especially if you use accounting software to help with financial planning. 

Here’s how to create a budget in five easy steps.

1. Set your time frame

A small business budget can last for anything from one month to a year or more. 

If you’re planning a change, such as entering a new market, you can create a budget specifically for this event.

Long-term budgets may become less accurate over time. Revisit them regularly and check your predictions are on track.

2. List your expenses

It’s vital to know how much money the business needs to spend. 

You can split your costs into:

• Fixed costs such as rent, insurance premiums, wages and loan repayments

• Variable costs such as materials, utility bills, packaging and travel expenses

• One-off expenses such as equipment upgrades, repairs and relocation costs 

Some of these are easier to predict than others. Fixed costs, for example, often remain the same for months or years.

For variable costs, owners of established businesses can use historical data to get an idea of future expenditure. Start-ups can base their estimates on average prices – before adding a top-up fund for one-off expenses.

3. Estimate your income

If your business has been trading for some time, you can predict future income by looking at how much you’ve previously made. 

If your business is a start-up, estimate your income by multiplying the number of sales you expect to make by the value of each sale. Consider any predictable fluctuations, such as seasonal highs and lows. New business owners should err on the low side to avoid spending more than they can afford.

4. Track your projected profit/loss

Once you’ve worked out your expected income and outgoings, you can calculate whether these figures will leave you with a profit or a loss.

Simply subtract your outgoings from the income you expect to make.

Say your income over a 12-month period is forecast to be £40,000 and your outgoings are £25,000. You should end up with a profit of around £15,000 if your budget holds true. 

If your budget indicates that your outgoings could exceed your income, look at other ways to increase your profit margin. These could include cutting costs, increasing prices, or diversifying into another, more profitable area.

5. Set up an emergency fund

No matter how good your budget, you can’t predict emergencies.

From equipment breaking to a client going bust, running a financially stable company means being prepared for the unexpected. To do that, you need an emergency fund.

Set aside three to six months’ worth of expenses where possible.

The amount may vary depending on the type of business you run. 

For seasonal businesses, for example, it’s important to have savings so you can survive quieter periods. 

Make the most of your cash fund by putting it in a business savings account with a competitive rate of interest – but make sure it offers easy access to your cash.

How often should I review my small business budget?

Long-range budgets tend to become less accurate over time as your expenses and income change. This is why it’s important to check and update your budget regularly.

Also, because budgets are based on predictions, you should review your actual expenses against your budgeted ones. If the figures differ, try to identify where and why. 

You should also review your budget if your business is changing – for example, because you’re moving to a new supplier. You need to factor such switches into your budget. 

Small business budgeting dos and don’ts

Do:

• Be accurate

Stick as closely to the real numbers as possible – otherwise you could end up overreaching or missing out on opportunities. 

• Be conservative

It’s better to have money to spare than to experience a cash flow problem because you’ve overspent.

• Set clear financial goals

Identify short-term and long-term goals, such as buying new equipment. Use your budget to find ways to achieve them.  

Don’t:

• Overstretch yourself

The most important thing is to stay afloat. So, keep your costs under control – particularly in the early days.

• Neglect cash flow management

If you fail to manage cash flow, you may have to spend some of your working capital to cover costs – or end up going out of business. 

• Miss chances to save money

Look out for unnecessary expenses, such as paying for an underperforming marketing campaign, and redirect the money to where it can do more good.