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Small-business budgeting is essential. Call it a financial roadmap guiding business growth. Call it a financial foundation, providing the stability business owners need to build their future. Call it a telescope that can provide financial clarity into operations. But however you view it, learning how to create a budget for a small business can be critical to its success.
Building a business budget for the first time may seem intimidating. An entrepreneur might wonder how to plan a budget around revenue that changes month to month or season to season, or how to anticipate surprise expenses. Some small-business owners might think they need to get their finances in better order before putting them into a document.
A business budget can help mark the first step towards getting business finances in order. Here’s what small-business owners may need to know about how to create a budget for a small business.
What Is a Business Budget?
A small-business budget is an organized accounting of all the money an owner expects to come in and go out of the business during a set period — often a month or a year — that is then compared to the actual revenue and expenses. The goal may not be for a business owner to be exactly right in their projections each period, but instead may be to adjust their numbers so that as time goes on the next budget becomes more accurate.
What Are the Benefits of Creating a Business Budget?
There are many advantages to creating a budget for a small business, including the ability to help:
- Monitor and manage cash flow
- Identify opportunities to reduce expenses
- Better forecast profits
- Anticipate and plan for upcoming expenses
- Set and meet savings goals
- Manage debt and anticipate financing needs
Types of Business Budgets and Budgeting Methods
The owner of a startup with relatively simple operations may choose to utilize one basic, overarching business budget. The more complex the small business, the more appropriate it may be to have multiple budgets to track and monitor different aspects of a company. This may include these types of business budgets:
- Operating budget: This is a detailed budget that includes everything that makes a business tick: revenue, fixed expenses, variable expenses, capital expenses, debt payments — any funds that come in or go out of the company.
- Cash flow budget: This less detailed budget shows only the big numbers from the operating budget — total revenue and total expenses. This helps allow owners to see cash-flow trends over time.
- Capital budget: This budget tracks the expenses related to, and sometimes savings for, major assets like heavy equipment, buildings, or land.
- Master budget: This topline budget uses information from all the other budgets to create a view of the business’s overall financial picture.
There are also different budgeting methods. When deciding how to create a business budget for their unique needs, a business owner might choose among these techniques:
- Fixed budget: As its name suggests, the goal of a fixed budget is not to change — it reflects financial projections set at the outset of the budget period. An established small business with stable finances might issue fixed budgets to different departments or projects.
- Flexible budget: A flexible budget adjusts its projections based on changes to business performance, seasonality, and other factors.
- Zero-based budgeting: This method drops spending to zero at the beginning of each new period. Every time the owner revisits the budget, they justify each expense. The result is a budget that goes up and down based on need.
- Incremental budgeting: Rather than fluctuating based on recently justified needs, an incremental budget only allows for small changes up or down over time.
6 Steps to Help Build a Budget for Your Small Business
The process of creating a business budget may be broken down into six manageable steps.
1. Analyze your current financial situation.
Consider reviewing past financial data, including revenue, expenses, and cash flow, using tools like bookkeeping software, financial statements, or financial planning software for businesses. Look for indications of the company’s financial strengths, weaknesses, and trends.
2. Define your financial goals.
Try to set clear short- and long-term financial goals. These goals can be realistic and measurable. When first learning how to create a business budget, these might change as you become more familiar with your business's finances.
3. Identify all revenue streams.
Expenses can sometimes be the main focus of a business budget, but paying close attention to revenue can also be essential. If a business owner simply looks at all money coming in as one revenue stream, they might miss insights that could help grow the business. For example, if a retailer monitors revenue by categories — such as apparel sold vs. jewelry, as well as recurring revenue vs. seasonal — they may be able to identify trends that allow them to expand offerings at key times.
4. Categorize and estimate expenses.
A small-business budget can provide a tool for managing — and reducing — expenses. Owners can aim to be as detailed as possible about each expense. They can track each expense by type: fixed, variable, seasonal, utilities, labor, inventory, etc. Owners may then find ways to optimize their spending — for example, realizing it’s more cost-effective to stock up on certain inventory during low-demand months.
A budget can also note expenses that may be coming down the line. As a point-of-sale system starts becoming obsolete, for example, a business owner may set aside some monthly funds to save for a new one.
5. Structure your budget and allocate funds.
Budgeting for future growth includes organizing a small-business budget so it lists funds the business owner doesn’t intend to spend right away. Examples may include line items for emergencies, debt payments, and growth opportunities.
Financial planning software for businesses can help owners structure their budgets, track revenue and expenses, and forecast future needs and performance.
6. Track, review, and adjust regularly.
A budget is not a one-time exercise. Owners may review and adjust their business budget monthly, weekly — sometimes even daily. Especially when new to budgeting, you may want to regularly compare budgeted spending vs. actual spending and adjust future budgets to better meet reality.
Take Charge of Your Business’s Financial Future
Learning how to create a business budget for a small business is just the beginning of taking greater control over your company’s finances. With a strong budget in hand, a small-business owner may find opportunities to grow revenue and reduce expense. Learn more in 10 Simple Ways to Cut Business Costs.
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