Creating a budget for a small business helps you allocate available income against upcoming costs more effectively. This makes it a powerful planning tool for both established businesses and start-ups.
So, not only is knowing how to set up a budget plan an important financial discipline, it is also essential when applying for a loan or seeking investment, as lenders will expect to see one as part of your business plan.
The importance of budgeting in business
The importance of creating a budget for a small business cannot be over-stated because you do not have a larger firm’s financial reserves to call upon if there is a problem.
Having a credible budget in place is especially important during periods of change in a business, when you need to manage limited financial resources, or if your sales are traditionally seasonal.
At its most basic, a budget helps ensure you have enough money to pay bills by highlighting any possible discrepancy between income and expenses. This means you can identify and avoid potential financial problems before they become more serious.
Beyond that, planning a business budget enables you to prioritise and manage your future spending. If your budget is realistic and you stick to it, you will know you have the money available in future for new equipment, marketing or for hiring new staff.
Small business budget planning in 3 steps
Creating a budget for a small business is usually done on a quarterly or yearly basis and you can adjust it accordingly if you predict significant changes in the months ahead. Here are the 3 key steps to prepare a budget for your company:
1. Determine your income.
Your business income governs how much money you have to spend. For most businesses, this will primarily come from sales. But predicting sales is not always easy, especially when starting up. However, you can get a better idea of your future revenue by using CRM software, for instance, which will give you a clearer picture of your sales pipeline.
Of course, it is not just a question of how much money comes in, but also when it is coming in. A sale slipping from one month to the next, for example, can have a major impact. That is why many businesses create cash flow budgets that give a more detailed idea of the money flowing into and out of a business. Cash-strapped companies and start-ups will find this particularly useful.
2. Calculate your expenses.
Expenses are either fixed or variable. As their name suggests, fixed costs stay the same for the near future, so you can confidently write these into your budget for months ahead.
Examples of fixed costs include:
- Tax Services
- Utilities (Phone, internet, etc)
Variable costs, on the other hand, change from month to month. They are often dependent on the level of business activity. For example, the more raw materials you use, the more your raw material costs will go up.
Examples of variable costs include:
Established businesses should have a good idea of their variable costs, start-ups less so. This means it is important to do your research to get the most accurate ‘guesstimate’ of what these might be. If in doubt, ask your accountant for help.
Do not forget to include ‘one-time’ expenses that will never arise again. Start-ups tend to have more of these because they are building their business infrastructure.
Examples of one-time expenses include:
3. Create your budget
Small business budget planning involves listing your income and expenditure on a quarterly or yearly basis depending on how you choose to create your budget. You could use a paper-based system to do this, though most people prefer an electronic version or some accounting software that quickly and accurately calculates any changes to your figures.
You can manage a budget in a number of ways, including by department, though many smaller businesses will use a single ‘global’ budget. The templates below should give you a good example.
It will take a little time to populate your budget with a set of income and expenditure figures. But as your business matures and develops a regular pattern of spending, budgeting should become easier. However, it is something you should never take for granted or consider an afterthought.
Template for planning a business budget
You can download our free small business budget template in excel here.
Or, if instead you work on Google Sheets you can get the business budget template for your startup here. In order to use it you’ll need to sign in and go to File > Make a copy.
It separates spending into different categories, then lets you compare actual figures with those you had previously forecast.
While these categories will work for most companies, depending on the nature of your business you may want to change or even sub-divide them to give you greater insight.
When all income and expenses are added up for each quarter, you can quickly see when you have an excess (profit) or a shortfall (loss) and make adjustments accordingly. To balance a budget, you will either have to increase sales or cut costs until income and expenditure are in sync.
It is important to make sure your budget figures are realistic, up-to-date and as accurate as possible. If they are not, your company budget may hide potential financial problems that you need to be aware of. So, it is better to be cautious by under-estimating income and over-estimating costs. That way you are less likely to get caught out.
Analysing previous budgets will also you give you an indication of how effectively you have spent money in the past. It can reveal high cost areas where expenditure is out of control and may need tightening.
How to manage a budget in business going forward
No matter what size a business is, a well-managed budget is crucial to its future success. Whether you’re a start-up or an established business, it is vital you stay on top of your business budget planning. So, if you lose a contract or sale, or make an unexpected purchase, you need to immediately amend your figures to reflect this.
You should also do a more thorough review every quarter. This is an opportunity to ensure your budget reflects reality. Future uncertainty always means the further ahead you project, the less accurate a budget becomes.
So in-depth quarterly reviews are a chance to compare forecast figures with the actual ones and gradually refine your forecast so that it becomes more accurate over time.
Creating a budget for your business does not have to be either complicated or overwhelming. But if you are not sure how to plan a budget for your business, ask your accountant for advice.
They can help you set one up correctly that works for your business, then help you to manage it effectively. They will also be able to point in you the direction of software, such as payroll software, to help you manage your processes better.