How To Prepare Your First Budget As A Business

You’re not alone if you’re running a small business and don’t yet have a thorough and detailed budget. Data shows that the smaller the company, the more likely you’re operating without a budget. However, if you create a budget, you’ll likely stick to it and spend less than expected. That’s because a business budget is a compass that helps you navigate your company finances. With a small business budget in place, you can maintain financial control through economic shakeups, changing operational costs, and contingencies. 

Let’s explore the different types of business budgets and how to create the best budget for your company’s financial success. 

Key Takeaways 

• A small business budget is a forward-facing tool that estimates future profitability based on past performance. 
• Business budgets vary according to industry, business model, and your company’s financial goals. 
• Budgeting is easier with accounting software that leverages automation in tracking business expenses. 
• Revise your small business budget consistently to maintain financial flexibility. 

Defining Essential Business Budget Terms

A business budget is a document or tool for tracking expenses and income. It can be simple or complex, weekly or annual, but it always looks forward at an organization’s finances. A small business budget anticipates spending and informs business decisions to make every cent count. 

A cash flow statement is similar to a business budget, but the difference is in the level of detail. A budget is more in-depth, while a cash flow statement is an overview of your expenses. Use a cash flow statement for a high-level look at your company finances and a budget for a more granular breakdown.

An actual budget is a retrospective tool prepared at the end of a given period. It compares the initial budget estimates against actual expenses to see whether reality matches or differs from expectations. 

Six Types of Small Business Budgets 

Various types of business budgets can offer unprecedented insights into your financial strategy. Companies usually rely on a combination of the following types of budgets: 

1. An Operating Budget 

An operating budget gives an overview of a company’s expected revenue and expenses. An accountant can prepare it at the start of every financial year and use them as a forecasting tool. The financial experts can also update the operating budget regularly to ensure the business functions within its means. 

2. A Master Budget

This business budget aggregates different departmental budgets, usually in larger enterprises. It helps businesses to plan the necessary activities in a given financial period and allocate funds for each department. Small businesses can also use a master budget if they provide multiple services that require separate funds. 

3. A Static Budget 

This business budget considers the fixed expenses and revenue for a given period. A static budget keeps your business focused on operational goals despite changing market conditions. Organizations like schools, nonprofits, and government agencies use a static budget to remain within their allocated resources for every financial year. 

4. A Financial Budget 

A financial budget considers your company’s assets, liabilities, and equity to determine the capital you need to sustain operations. It offers a glimpse of your company’s overall financial health. 

5. A Cash Budget 

This budget considers the liquid cash necessary for operations based on sales forecasts, accounts payable and receivable, and production costs. A cash budget shows whether your current business direction is profitable or whether you need to pivot your financial strategy accordingly. 

6. A Workforce Budget 

If you intend to hire more employees, a workforce budget or labor budget is a valuable tool to plan for payroll and other staffing-related expenses. It’s beneficial if your business model relies on seasonal workers. 

Small Business Budgets by Industry

In addition to the above budget types, your business budget can depend on your specific industry. Here are some unique budgets to consider: 

1. Inventory Business Budgets 

A company that relies on buying, keeping, and maintaining physical products requires an inventory budget. This business budget can help negotiate with vendors, manage storage and shipping costs, determine product pricing, and plan to dispose of leftover stock. 

2. Seasonal Business Budgets 

Businesses with distinct high and low seasons need tailored budgets to plan their finances. A seasonal business budget helps you prepare for slow months by setting money aside or cutting costs. It also reveals cash flow trends you can leverage when negotiating with suppliers and planning customer loyalty strategies. 

3. Startup Business Budgets 

Startups typically focus on a single product or service with the aim of scaling. A startup business budget varies with companies and products, but it must match industry standards for outsourcing talent, paying in-house teams, hiring advisors, and purchasing equipment.  

4. E-Commerce Business Budgets 

An e-commerce small business budget includes shipping costs as a significant component, web hosting and design, digital advertising and marketing, product photography, and local and international warehousing costs. These elements greatly impact a company’s finances and can quickly get out of hand without a budget. 

5. Service Business Budgets 

As customer demands fluctuate, small accounting, insurance, legal, or creative services businesses also require a flexible business budget. If your business supplies intangible goods, use a service budget to plan for salaries, time spent on lead generation and delivery, and other overheads. 

6. Custom Order Business Budgets 

Businesses that create bespoke goods require a customized business budget. It must include materials, labor time, and operational costs that vary with every order. A custom order budget enables you to give quotes to customers and make the correct financial estimates to guide your production process. 

Five Benefits of A Small Business Budget 

A business budget is a good practice for entrepreneurs to maintain a financially healthy company. Budgeting presents the following advantages: 

• Understanding Business Expenses 

The two main types of business expenses are fixed and variable expenses. Fixed costs include rent, insurance, and utilities; variable costs include credit card fees, travel expenses, and sales commissions. Once you break down your costs, you can plan your resources accordingly and adjust to disruptions without losing profits. 

• Identifying Tax-Deductible Expenses

Expenses like licenses, major equipment purchases, and hiring consultants are one-time costs that are usually tax deductible. Note these expenses in your business budget and ask your accountant about saving opportunities as you file your taxes. 

• Securing Funding

Since a small business budget is a forecasting tool, you can use it to pitch your expected expenses and revenue to lenders and investors. A comprehensive budget alongside your business plan demonstrates your company’s potential and commitment to success. 

• Avoiding Debt 

A business budget reveals a way of saving money and prepares you for slow seasons and downturns. Use your budget to redistribute available resources to cover uncertainties without needing more credit. 

• Planning for Leftover Funds 

You often find extra funds if you stick to your business budget and review your spending quarterly. You can reinvest these funds into your business, pay off debt, reward top-performing employees, save it in an emergency fund, or give back to your community. 

Qualities of A Good Business Budget 

A reasonable business budget has four essential components: 

• A revenue estimate: The first line on your small business budget is the amount you expect to make. It can be your industry’s average revenue if your business is brand new or your performance over the last financial year if your company is at least one year old. 
• Total costs: These include the fixed, variable, and one-off costs you expect in your daily operations. Knowing your expenses allows you to set aside resources to keep your company going for the coming financial period. 
• Cash flow: This is the lifeblood of your small business, so monitor how much cash moves in and out of your company. Use cash flow to plan for big purchases and stay afloat during dry seasons. 
• Profit: Your expected profit is a product of your revenue, expenses, and cost of goods sold. It can help you to increase your margins, boost sales and marketing, and reinvest in your company. 

As you calculate these figures, be realistic about your small business budget. If possible, use your previous financial records as your primary data source. Otherwise, do your due diligence to study your industry and use the most accurate data to plan your business budget.

How To Make A Small Business Budget In 7 Steps 

Let’s now look at the step-by-step process of creating a business budget. 

Step 1: Define Your Financial Goals 

What is your company working towards in addition to growing revenue? You can introduce a new product or service, commit to research and development, or reduce business costs. Know your overall financial goals before you compile your business budget. 

Step 2: Calculate Your Business Expenses 

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Next, outline all your business costs and group them into three categories: fixed, variable, and one-off expenses. 

Fixed expenses 

The top five fixed costs for a small business are: 

• Rent and utilities 
• Insurance
• Payroll
• Licenses 
• Taxes

Others include interest expenses, equipment leases, asset depreciation, debt repayments, training and education, and administrative fees. Fixed costs recur every week, month, or year and remain unaffected by sales or production volumes. If you want to reduce fixed costs, consider outsourcing and hybrid workplaces. 

Variable expenses 

The top five variable costs are: 

• Advertising and marketing 
• Cost of goods sold
• Transaction fees 
• Bonuses and incentives 
• Office Supplies 

Others include recruitment costs, raw materials, hourly wages, projects and initiatives, spare parts, meals, travel, entertainment, and commissions. Variable costs are easy to reduce during financial hardships but also increase as a business makes more sales. Consider negotiating with suppliers, comparing vendors, and eliminating unnecessary expenses to reduce variable costs. 

One-time expenses 

The top five one-time costs are: 

• Equipment repairs
• Data recovery 
• Emergencies, e.g. natural disasters 
• Relocation costs 
• Renovation costs 

These expenses are challenging to track because they’re unpredictable and happen rarely. Record and categorize these expenses to set aside contingency funds. 

Step 3: Estimate Your Income and Revenue 

This step can be simple or complex, depending on your business model. If your company is subscription-based or locks in clients with contracts, you can easily estimate your income and revenue, unlike businesses that rely on active sales. Use your historical sales and marketing data and industry trends as a reference for your small business budget.

Also include other income streams like asset sales, investment returns, and share offerings. Break down your income by month and quarter to see how it fluctuates over time. Then subtract your estimated expenses from revenue to determine if your company will be profitable based on your business budget. 

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Step 4: Track Your Spending and Make Adjustments as Needed

Creating a small business budget is one thing, but tracking your expenses is another. If you want complete control over your company finances, you need a financial tracking strategy that works for you and your team. Here are some methods of tracking business expenses: 

• Open a business bank account for all your fixed, variable, and one-off expenses. Avoid mixing company and personal funds to avoid unnecessary spending and make tax filing easier. 
• Opt for debit cards rather than credit for business transactions to protect your credit score. Debit cards allow you to allocate funds, set spending limits, and authorize permissions for specific employees. 
• Use a scanner or smartphone scanning app to digitize all receipts and invoices. Keep these documents in a secure backup for auditing purposes. 
• Choose accounting software that automates financial record keeping and connects your budget to your business bank account. This helps you seamlessly transfer transaction data and offers transparency into your expenses. 

Step 5: Create A Savings Plan for Unexpected Costs

A contingency fund is critical to managing a small business budget. Unexpected costs can make or break your operations because they’re sudden, inconvenient, and expensive. Consider everything from a vehicle breakdown to an employee resigning and emergencies caused by natural and man-made events. 

Instead of getting blindsided, identify the risks impacting your business and set aside an estimated amount to cover you. Save at least 10% of your income in a separate business account and maintain healthy lines of credit that you can still access to cover unforeseen events. 

Step 6: Check Your Surplus and Deficit 

Once you have these financial estimates, ask yourself: can your expected income cover all your expected expenses? If yes, you have a business budget surplus that can go into your contingency account or fund an R&D project. If not, you have a deficit that requires a creative approach. 

You could streamline your sales strategies, negotiate with vendors, sell company assets, or consider a business loan to help you reach your goals. Surplus and deficit figures constantly change with market circumstances, so prepare your financial targets and strategies to maintain a healthy bottom line. 

Step 7: Revisit Your Budget Regularly to Make Sure You’re on Track

Some business budget categories may consistently exceed allocated funds, while others unexpectedly go below budget. New projects also impact your budget, as do marketing and fundraising opportunities. Regular revision and analysis are the only way to know your budget is adequate. 

See where you’ve over or under-budgeted and look for innovative ways to run a tight ship without compromising your value proposition. Revise your budget monthly, quarterly, and annually to accommodate changes and maintain profitability. 

Expert Tips for An Effective Small Business Budget

Creating a business budget requires time and dedication, but here are some ways to make the process easier.

• Use a template: If your company is relatively small, a business budget template may be enough to get you started. Templates are available online and easy to customize and export into accounting software. 
• Use a profit and loss statement (P&L): This document shows trends that impact your small business budgets, such as seasonal changes, big one-time purchases, and unexpected profits. A P&L will help you judge your company’s financial performance over the long term rather than stressing over temporary fluctuations. 
• Hire an accountant: If business operations demand all your time or bookkeeping isn’t your forte, find an expert to help you with your business budget. Consider having a full-time CFO as part of your team or outsourcing bookkeeping to a reputable partner. 
• Keep projects short-term: If you’re considering a digital transformation, upskilling program, or new product development, ensure that they’ll take the shortest possible time using only the necessary resources. Otherwise, long-term projects can seriously drain a small business budget. 
• Understand relationships between expenses: Adjusting your business budget is highly recommended, but it means more than changing a line entry. If you hire a new team member, add related expenses like payroll, taxes, and benefits to the recruitment costs. Find out what budget items connect to a digital marketing campaign, software upgrade, or adding a new product to your inventory. 

Conclusion 

Whether or not you have an accounting background, budgeting is essential to running a small business. A reasonable business budget helps entrepreneurs to set achievable goals, access capital, predict revenue, and survive economic uncertainty. 

If you’ve just started your business, begin preparing your budget using bookkeeping software and learn as you go. It will be easier to scale as your company grows. Finally, always use your past financial performance to predict your future success and leave room for flexibility. This approach gives you the financial control you need to maintain a thriving business.