Budgeting in business: what you need to know

To succeed, a business must hit its goals – and that starts with the numbers. A budget organises actual and projected income alongside costs, guiding spending and highlighting where to cut back. Here’s what you need to know about budgeting and why it matters. 

Key takeaways

• A budget helps manage income and expenses, ensuring financial stability and growth

• It guides decision-making, prioritises spending and identifies potential risks

• Regularly reviewing and adjusting a budget keeps a business on track

What is business budgeting?

Business budgeting tracks money coming in and going out. It clarifies cash flow and guides spending decisions.

Projected numbers in business are always estimates. Last year’s revenue matters in working out estimates, but how much do you plan to make this year? How much must you sell to do it? How much will it cost?

A budget helps answer these questions. It tracks spending, sets targets, keeps you accountable, and identifies financial risks. And since the numbers are estimates, you can adjust the budget to reflect slow or strong sales periods.

Five reasons why a budget is important

It’s easy to focus on daily tasks and lose sight of the bigger picture. But running a business without a budget is like sailing in thick fog – you can’t see what’s ahead. And spending without limits or a clear understanding of your finances can quickly lead to failure. Here are five reasons why budgeting is essential for a business:

1. Provides financial clarity

A budget tracks income and expenses, helping you understand your business’s financial position. Without it, you’d rely on guesswork. A budget ensures you have enough cash to cover expenses and maintain healthy cash flow, essential for stability and growth. 

2. Sets spending goals 

You’ve probably heard people discuss performance in relation to being under or over budget. Successful businesses place significant emphasis on their budget goals. And so should you. It helps you prioritise spending as new demands arise, while keeping you focused on your goals.

3. Guides decision-making

A budget clearly shows your financial situation. It helps you make informed choices about where to allocate resources, whether for expansion or cutting costs. A budget enables you to assess each decision’s impact. This restricts impulsive spending and keeps your business on a sustainable path.

4. Strengthens funding applications

Your business might need financial help at some point, whether through a business loan, asset finance or investment. A clear budget supports your case to lenders or investors. It adds detail to your business plan and shows how you intend to achieve your projections. This insight can reassure lenders and investors.

5. Identifies risks

A budget identifies financial risks by tracking income and expenses. It helps you spot potential issues such as cash flow shortages or overspending before they escalate. By reviewing your budget regularly, you can adjust and take action. This enables you to address issues quickly and minimise their impact. 

Types of budgets

You can divide your business budget into smaller categories. 

Here are some of the main types: 

• Master budget: A comprehensive budget that consolidates all individual budgets within a business, including sales, production and operating budgets, to create an overall financial plan

• Labour budget: Forecasts labour costs, including wages, benefits and overtime, to manage staffing expenses

• Cash budget: Projects cash flow over a specific period, helping you meet obligations. It also helps you determine if you’re set to make a profit

• Sales budget: Estimates future sales revenue, helping you plan and determine the resources needed to meet targets

• Operating budget: Covers ongoing expenses, such as rent, utilities, marketing and administrative costs

• Static budget: A fixed budget based on a set level of revenue. Businesses with predictable income, such as government bodies and non-profits, typically use this type of budget. It does not adjust to changes in business conditions

How to prepare a business budget

Start with understanding your costs. First, gather a list of your expenses. This could include:

• Rent

• Utilities

• Salaries

• Supplies

• Manufacturing costs

• Materials

Once compiled, this list will allow you to compare your projected income with your expenses to identify shortfalls or surpluses. You can speak to an accountant or financial advisor for help. 

When you have all your numbers to hand, you’re ready to create your business budget.

Essential budgeting tips for small business owners

• Track all expenses: Keep a detailed record of all costs to avoid surprises

• Estimate realistic income: Set achievable revenue goals based on past performance and current market conditions

• Prioritise cash flow: Ensure your budget focuses on managing cash flow to avoid running out of money

• Review regularly: Update your budget frequently to reflect changes in sales, expenses or goals

• Plan for the unexpected: Include a buffer for unforeseen costs