what can a business plan for with an efficient budget

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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How to Create a Business Budget for Your Small Business

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A business budget estimates future revenue and expenses in detail, so that you can see whether you’re on track to meet financial expectations for the month, quarter or year. Think of your budget as a point of comparison — you run your actual numbers against it to determine if you’re over or under budget.

From there, you can make informed business decisions and pivot accordingly. For example, maybe you find that your expenses are over budget for the quarter, so you may hold off on a large equipment purchase.

Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.

» MORE: What is accounting? Definition and basics, explained

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How does a business budget work?

Budgeting uses past months’ numbers to help you make financially conservative projections for the future and wiser business decisions for the present. If you’ve had a few bad months and predict another slow one, you can prepare to minimize expenses where possible. If business has been booming and you’re bringing in new customers, maybe you invest in buying more inventory to satisfy increased demand.

Creating a business budget from scratch can feel tedious, but you might already have access to tools that can help simplify the process. Your small-business accounting software is a good place to start, since it houses your business’s financial data and may offer basic budgeting reports.

To create a budget in QuickBooks Online , for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.

You can then compare actual versus projected figures side by side by running a Budget vs. Actuals report. Businesses that need more in-depth features, like cash flow forecasting or the ability to use different projection methods, might subscribe to business budgeting software in addition to accounting software.

If your small business doesn’t have access to these features or has simple financials, you can download free small-business budget templates to manually create and track your budget. Regardless of which option you choose, your business will likely benefit from hiring an accountant to help manage your budget, course-correct when the business gets off track, and make sure taxes are being paid correctly.

Why is a business budget important?

A business budget encourages you to look beyond next week and next month to next year, or even the next five years.

Creating a budget can help your business do the following:

Maximize efficiency. 

Establish a financial plan that helps your business reach its goals. 

Point out leftover funds that you can reinvest.

Predict slow months and keep you out of debt.

Estimate what it will take to become profitable.

Provide a window into the future so you can prepare accordingly.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.

How to create a business budget in 6 steps

The longer you’ve been in business, the more data you’ll have to inform your forward-looking budget. If you run a startup, however, you’ll want to do extensive research into typical costs for businesses in your industry, so that you have working estimates for revenue and expenses.

From there, here’s how to put together your business budget:

1. Examine your revenue

One of the first steps in any budgeting exercise is to look at your existing business and find all of your revenue sources. Add all those income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months and preferably for at least the previous 12 months, provided you have that much data available.

Notice how your business’s monthly income changes over time and try to look for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.

Then, you can use those historic numbers and trends to make revenue projections for future months. Make sure to calculate for revenue, not profit. Your revenue is the money generated by sales before expenses are deducted. Profit is what remains after expenses are deducted.

2. Subtract fixed costs

The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They might occur daily, weekly, monthly or yearly, so make sure to get as much data as you can.

Examples of fixed costs within your business might include:

Debt repayment.

Employee salaries.

Depreciation of assets.

Property taxes.

Insurance .

Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the next step.

3. Subtract variable expenses

As you compile your fixed costs, you might notice other expenses that aren’t as consistent. Unlike fixed costs, variable expenses change alongside your business’s output or production. Look at how they’ve fluctuated over time in your business, and use that information to estimate future variable costs. These expenses get subtracted from your income, too.

Some examples of variable expenses are:

Hourly employee wages.

Owner’s salary (if it fluctuates with profit). 

Raw materials.

Utility costs that change depending on business activity.

During lean months, you’ll probably want to lower your business’s variable expenses. During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.

4. Set aside a contingency fund for unexpected costs

When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.

Although you might be tempted to spend surplus income on variable expenses, it’s smart to establish an emergency fund instead, if possible. That way, you’ll be ready when equipment breaks down and needs replacing, or if you have to quickly replace inventory that's damaged unexpectedly.

5. Determine your profit

Add up all of your projected revenue and expenses for each month. Then, subtract expenses from revenue. You may also see the resulting number referred to as net income . If you end up with a positive number, you can expect to make a profit. If not, that’s a loss — and that can be OK, too. Small businesses aren’t necessarily profitable every month, let alone every year. This is especially true when your business is just starting out. Compare your projected profits to past profits to confirm whether they’re realistic.

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6. Finalize your business budget

Are the resulting profits enough to work with, or is your business overspending? This is your opportunity to set spending and earning goals for each month, quarter and year. These goals should be realistic and achievable. If they don’t line up with your projections, make sure to establish a strategy for making up the difference.

As time goes on, regularly compare your actual numbers to your budget to determine whether your business is meeting those goals, and course correct if necessary.

» MORE: Ways your small business can spend smarter

A business budget projects future revenue and expenses so you can create a smart, realistic spending plan. As the year progresses, comparing your actual numbers against your budget can help you hold your business accountable and make sure it reaches its financial goals.

A business budget includes projected revenue, fixed costs, variable costs and the resulting profits. You can also factor in contingency funds for unforeseen circumstances like equipment failure.

On a similar note...

How to Write the Perfect Business Plan: 10 Essential Steps

Whether you’re starting a new small business or are already years into operating one, a business plan is one of the best ways to clarify your long-term vision. Follow our step-by-step guide to writing a highly effective business plan.

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hether you’re starting a new small business or are already years into operating one, a business plan is one of the best ways to clarify your long-term vision. While every business plan is different, there are several key elements to consider that will benefit you in the long run. 

Follow our step-by-step guide to writing a highly effective business plan. 

What is a business plan?

A business plan is a document that outlines your business goals and how you plan to achieve them. Ideally, this will become your roadmap for marketing, sales, finance, and growth. 

In other words, a business plan is...

• An explanation of your overall vision.
• A valuable tool to plan and track your business fundamentals.
• An overview of your path to profitability, which can help get funding for your company.

Do You Need A Business Plan?

While it’s not a requirement, having a business plan is strongly recommended. In a recent QuickBooks survey , nearly 70% of current business owners recommended writing a business plan.

Creating a business plan is especially useful in the following scenarios:

• Applying for business loans
• Seeking additional rounds of funding or investors 
• Growing your employee headcount  
• Attracting top-level management candidates 
• Looking for opportunities to scale your business

10 Steps To Creating A Comprehensive Business Plan

While not every business plan is the same, there are a few key steps you should take to create an effective and comprehensive document:

1. Create an executive summary

Think of an executive summary as your company's elevator pitch in written form. It should be 1 to 2 pages in length and summarize important information about your company and goals. If you are pitching your business plan to get funding, you should ensure your executive summary appeals to investors.

What should you include in an executive summary?

• An overview of your business
• Your company mission statement
• A concise description of products or services offered
• A description of your target market and customer demographics
• A brief analysis of your competition
• Financial projections and funding requirements
• Information about your management team
• Future plans and growth opportunities
• An overall summary of your business plan

2. Write your company description

Your company description is a more detailed and comprehensive explanation of your business. It should provide a thorough overview of your company, including your company history, your mission, your objectives, and your vision. A company description should help the reader understand the context and background of the business, as well as the key factors that contribute to its success.

What should you include in your company description?

• Official company name 
• Type of business structure
• Physical address(es)
• Company history and background information
• Mission statement and core values
• Management team members and their qualifications
• Products and services offered
• Target market and customer segmentation
• Marketing and sales strategy
• Goals (both short- and long-term)
• Vision statement

Novo Note : The company description is your chance to expound on the pain points your company solves. It should also give a reader an accurate impression of who you are. 

3. Conduct and outline market analysis

This is one of the most important steps in building a business plan. Here, you will assess the size and dynamics of the market your business operates in.

How to conduct a market analysis

Market analyses include both quantitative and qualitative data. You may want to conduct surveys or lean on existing industry research to gather this information. You’ll want to answer:

• What is the size of the market?
• How much revenue does your industry generate?
• What trends are impacting this industry?
• Where are opportunities for innovation?
• What are the most well-known companies in the industry? What tactics do they use to sell to customers? How do they price their offering?
• Where are there gaps in the market? 
• What are your customer demographics? What problems do they have that need solving? What are their values, desires, and purchasing habits?
• What barriers to entry, if any, exist? These could include startup costs, legal requirements, environmental conditions that impact consumer behavior, and market saturation.

What is your target market?

In this section, you will specify the customer segment(s) you’re targeting . You can divide customers into small segments organized by age, location, income, and lifestyle. The goal is to describe what type of consumer will be most interested in your offering.

Novo Note : Regardless of your company’s size, understanding the trends and opportunities within your target market enables you to build a more effective marketing plan to distinguish yourself from the marketplace and grow your business. This analysis might also help you find potential customers or new products you could offer. 

4. Analyze your competitors

After conducting a market analysis, you need to do a deep dive into your competitors. Look at how the competition is succeeding or failing and how each competitor has positioned itself. For example, you might want to evaluate your competitors’ brand, pricing, and distribution strategies. 

How to conduct a competitive analysis

You’ll want to research your competitors and ask the following questions:

• What are their strengths?
• What are their weaknesses?
• What are their customer reviews like?
• How do they price their offering(s)?
• What are their value propositions?
• What marketing and sales channels do they leverage?
• How are they growing and evolving?

Novo Note : After you develop a strong understanding of the competitive landscape, consider how your business is unique. Solidifying your competitive advantage can help you appeal to your target audience.  

5. Describe your products or services

This is your chance to go into more detail about the products and services you offer! Use this opportunity to note where your offering or service differs from others in the industry. Highlight the standout features of your product, your company’s unique ability to solve customer problems, and your product roadmap.

What to include:

• Your product catalog
• Key differentiating features
• Information about the production process
• The resources required for production
• Plans for future product releases

6. Define your marketing and sales strategy

Your marketing plan describes your strategy for connecting with your target market and generating leads. It doesn't need to be full-fledged at this point, but it should answer who you're trying to sell to and how you plan to target them. Investors also want to know how you plan on selling your brand and breaking into the market, so make sure to consider their perspective as you develop your marketing strategy.

• Your sales and marketing budget
• Your key sales and marketing objectives
• Details about your sales process and sales goals
• Platforms or strategies you’ll employ to reach your target audience
• PR initiatives, content ideas, and social media strategies

7. Gather your business financials and outline financial projections

Your financials section lays out your company's past and current performance. You can also include a roadmap that dives into financial projections for your business. Aim to include projections for the next five years at a minimum.

• Income statements
• Cash flow statements
• Balance sheets
• Explanation of any significant changes

Novo Note : Novo offers integrations with accounting software like Quickbooks and Xero , allowing you to seamlessly access all your financial information within your business checking account .

8. Describe your organization

Your business plan should also include an organizational chart that maps your company’s structure. 

What to include :

• Company’s management structure
• Other key personnel, along with their roles and responsibilities
• Expertise of your team (feature any specialists or experts)

Novo Note : This is also a good place to explain the legal structure of your company — for example, if you are an LLC , a corporation, or a sole proprietorship . 

9. Outline your funding requests

If you’re looking for business funding, include an outline of any funding requests and requirements.

• Why you are requesting funding
• What the funding will be used for specifically
• Desired terms and conditions of funding
• The length of time over which the funding will be used
• Type of funding required (for example, debt or equity)

Novo Note : Propose a five-year funding plan, and aim to be as detailed as possible about how you will utilize the funds to grow your business. 

10. Create an appendix

The last section, the appendix, includes supporting documents and additional information not listed elsewhere in your business plan. Not all of these items are necessary to include, so you’ll need to evaluate which are most relevant to your business. You might also want to include a table of contents to help keep the appendix organized.

Items to consider including:

• Bank statements
• Business credit history
• Legal documents
• Letters of reference

Sample Business Plans

Need an example to help you through the process? Check out the Small Business Administration’s downloadable examples or this even more in-depth one from Harvard Business School.

Tips For Creating A Great Business Plan

Here are some of our favorite tips for creating the most effective and efficient business plan:

• Keep it short and sweet : You want to be sure people will actually read your business plan, so stay on topic and to the point.
• Make it digestible : No need to use the fanciest terminology or draft up the most complex graphs. Keep wording and ideas simple and straightforward — it’s the most impactful way to get your information across.
• Triple-check your work : There’s nothing worse than noticing a grammar, spelling, or mathematical error when you’re presenting your vision. So proofread… and then proofread again!
• Start early : It’s never too late to write a business plan, but the earlier you do it, the stronger your strategy for growth and expansion will be from the start.
• Reference credible sources : If you are going to reference third-party research in your business plan, lean on sources that are widely recognized as authorities. Try tapping into trade associations and government resources, like U.S. Census data or data from the Bureau of Labor Statistics.
• Set yourself apart : Wherever you can, explain why your product or service stands out and how it can solve a problem.
• Be objective : Avoid the instinct to only showcase the good. Stakeholders and investors want to know that you are realistic and have a contingency plan if you hit a bump in the road.

Updating Your Business Plan

As with most situations in business (and life), things change! So don’t think that your business plan has to be set in stone after you create it. Instead, you should plan to return to it once a year and make updates.

Be sure to do the following when you review and update your business plan:

• Analyze your progress: Review your original business plan and compare it to your actual financial data. Are you moving in the right direction, or do you need to reevaluate your strategy?
• Consider whether your product offerings need to be adjusted: For example, decide if you want to diversify your product offerings or scale back and focus on a singular product. 
• Reassess your overall goals: Perhaps your sales goals have changed with your new marketing strategy. Or maybe your customer’s needs have changed. In any case, be flexible where needed. 

We know there’s a lot that goes into creating a business plan, but it’s worth it. There’s no one-size-fits-all formula for developing a business plan, but our steps outlined above will put you on the right track for developing a comprehensive, investor-friendly document.

Take time to review your business plan annually and make changes as your needs and goals change.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

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The Ultimate Guide to Budgeting for Small Businesses

By Andy Marker | March 4, 2022

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Creating a budget for your small business can be daunting, but doing so is essential for any successful company. We’ve rounded up expert tips and created a step-by-step guide for designing a strong small business budget.

Included on this page, you’ll learn why a budget is necessary for small businesses and how to create a budget using Excel . Plus, you’ll find a free, downloadable small business budget starter kit .

What Is a Small Business Budget?

A small business budget is a detailed outline of your financial status and projection, based on your historical financial data. It includes your projected income and expenses and is used to determine where your money is best spent.

Ahmet Yüzbaşıoğlu, the Co-Founder of Peak Plans , explains the importance of budgeting for small businesses: “The success of your business is determined by the quality of your decisions. If you want to make informed decisions, you must have a budget. A budget can help you create a plan for the future, whether it's for your company as a whole or for smaller departments. More importantly, [a budget] gives you guidelines with which to make decisions. If budgeting is not yet a part of your business strategy, it may be worth considering it as an option to provide you with insights that can help you to better plan for all aspects of your company.”

Do Small Businesses Need a Budget?

All businesses should have a budget, especially small ones with less room for errors. A small business can better weather periods of low income by knowing exactly where its money is going, forecasting sales, and identifying what can be cut when needed.

Stephen Light, the Co-Owner of Nolah Mattress , gives his take on why all small businesses should have a budget in place: “For small businesses, creating an effective budget is one of the most important tools to carve a successful path to profitability. Budgets are crucial for allocating funds efficiently and curbing any unnecessary or wasteful spending, [which is] an easy trap to fall into if you don’t have a framework or goalposts to stay within. Budgets are especially important to small business owners who might be using their personal funds.”

How Much Should a Small Business Budget Be?

Your budget should be based on historical financial data and not exceed what you expect to make in the budgeted period. Be realistic with your numbers and projections so that you do not find yourself in a position you cannot recover from.

Your budget should take into account all of your sources of revenue and all of your expenses, as well as an additional percentage for any emergencies or surprises. 

“Small businesses should absolutely be sure to pad their budget with contingency funds for unseen expenses,” suggests Light.

Larger businesses tend to make budgets annually , but for a small business, especially at first, it is a good idea to break down your budget monthly. To get started and identify a realistic monthly budget for your business check out our small business monthly budget templates for Google Sheets.

Importance of Budgeting in a Small Business

A budget helps a small business anticipate challenges, achieve and track financial targets, and secure investment opportunities. A well-considered budget should help a small business to encounter fewer unforeseen expenses and more opportunities. 

Below are some benefits of having a strong budget:

• Make Informed Decisions: A company can make more informed decisions more efficiently when they have a budget. A good budget is built on historical data and allows you to learn from your experience. “Budgeting is a great strategy for maintaining informed control of your business. You can use data insights to plan with greater clarity and organize all of your finances in one place. This allows your leadership team to have the necessary information to drive their decision-making processes more efficiently, which is a great way for your business to act on its data,” explains Yüzbaşıoğlu.
• Identify Growth Opportunities: With a budget in place, you can identify the most profitable projects for your company. Use your budget data over time to see where current resource allocation provides the most payoff. As Yüzbaşıoğlu says, “You can use budgeting to create assumptions about your business projections by measuring the effects of different investments on your business. For example, you can make conclusions about how much revenue an investment in sales will bring in with the information gathered from your marketing efforts. By evaluating different scenarios, you can consider your options for best achieving your goals. Observing different scenarios will soon help you find which strategies work best for your business.”
• Weather Leaner Business Times: All businesses should expect to encounter lean times. Having a budget in place can help you stay afloat by tracking which times are historically slow and by establishing an emergency fund. Knowing when to spend your money can be just as important as what you spend it on.

• Manage Risk: A well-crafted budget can help you to identify potential risks by gaining visibility into your spending. If you don’t track your money, it is easy to spend much more than you had planned (on an unsound investment). “Looking ahead is important for risk management ,” says Yüzbaşıoğlu. “Budgeting is a good way of looking ahead and contains similar methodologies as risk management. A budget allows you to look ahead and see how your activities in different areas will affect the company’s cash flow, earnings, and profitability.”
• Measure Performance: Having access to current and historical financial data from your business allows you to measure financial performance year over year. Without tracking this information, you cannot know which goals you are meeting. “Budgets are the most important tools that managers use to measure how well an organization is doing. Although budgets are commonly perceived to exist for financial purposes only, they can also be key tools to provide insight into how an organization and its departments are performing. Identifying variances — such as differences in expenses and costs and increase or decrease in sales and profits — will give a good overview to management about the performance of the company and its departments,” explains Yüzbaşıoğlu.
• Set Company Goals: A budget is a great place to start goal setting. Whether you aim to spend less over time or drive more sales, a budget gives you concrete numbers on which to base your financial goals. “When all parties are on the same page about the strategic goals of the company and the means of attaining them, it is much simpler to monitor success and work together to keep the organization on track to achieve its goals,” suggests Mains.

What Should a Small Business Budget Include?

A small business budget should include all income and expenses the business accrues over a given period. These numbers may change month to month, so it is important to either use an average, or to overestimate expenses and underestimate income.

Linn Atiyeh, the CEO and Founder of Bemana , highlights some major small business budget expenses that may not be immediately obvious. “[The expenses] need to include everything, from the employees themselves to the office spaces that they work in. They need to include technology, software, onboarding, training, client acquisition, insurance payments, marketing, product development, employee compensation, and any other anticipated costs,” she says.

The following bullets outline what to include in your budget:

• All Income and Expenses: Your budget should consider the entirety of your income and expenses. Note fixed and variable costs. It may also be beneficial to keep track of which expenses you can easily cut during lean times.
• Small Business Financial Plan: When creating your budget, consult your financial plan. If you do not have one, create an income statement and a cash flow statement . “You must incorporate your cash flow in your projections. Cash flow refers to the total amount of money that flows into and out of a firm. If you have positive cash flow in your firm over a certain period of time, this means that more money is flowing into your business than is leaving it,” says Mains. To learn more, read our how-to guide on creating a small business financial plan.
• Historical Sales Numbers: If you have them, use your historical sales numbers to project your income during the same time period in the future. If you don’t have historical data, start tracking it. As you continue to track this information, you will get a better idea of how much money your company is making and spending at different times of the year.
• Sales Forecasts: Create a sales forecast and use it to estimate your projected income. This information will help give you a target number for your budget.
• Emergency Fund: Any strong budget will include some wiggle room for emergencies and surprise expenses. Most sources recommend keeping three to six months’ worth of business expenses in an emergency fund — but remember that some money saved is better than none at all.
• Seasonal and Industry Trend Information: Most industries have slow seasons and busy seasons, and it is important to know when those times are. If you don’t have this information from your own business, a quick Google search can often tell you the answer.
• Growth Projections: Factor any expectations for major growth into your budget, such as opening a new storefront, buying new equipment, or hiring and training a new department.

How to Create a Budget for a Small Business

To create a budget for your small business, determine how much money your company spends and makes, and estimate how it will do so in the future. We’ve outlined how to create a budget in the steps below:

1. Gather Your Financial Information

This includes all income and expense information from previous years and any previous budget information you may have.

“To begin with, collect financial data, predictions, and market analysis to aid in the development of your small company's budget planning,” suggests Lattice Hudson, Business Coach and Owner of Lattice and Co . “To design your budget, consider the company's overall business and overall strategy in addition to the crucial financial data and analytics.”

2. Add Up Your Income

Use a small business budget template or spreadsheet to itemize and add up your income. Consider using a tool that tracks itemized income monthly so that you can more easily note changes over time.

3. Subtract Fixed Costs

Your fixed costs won’t change month to month, so they are the easiest to subtract from your income. Fixed costs might include rent, salaried employees, and non-variable utilities.

4. Determine and Subtract Variable Expenses

Not all costs are fixed, so you may need to do a little digging to determine some of your expenses. Calculate how much the company spent on hourly employees, variable utilities, and break room snacks and business lunches. 

“Variable costs are those that change from month to month depending on your company's success, [such as] consumption-based utilities, delivery charges, transport costs, and sales commissions. When your earnings are greater, you may spend more on variable costs, but when your earnings are lower, you should aim to cut back where you can,” says Hudson.

5. Profit and Loss Statement

Prepare a profit and loss statement from the data you’ve collected. Outline how much your company made and spent in a given time period. This will be the first indicator of what your budget numbers should look like.

6. Outline a Forward-Looking Budget

Create your budget using the numbers from historical profit and loss statements. Your income and expenses may grow or shrink over time, so it is important to calculate an average or to add a buffer to your expenses. Your budget should always have money left over for incidentals, as well as allocation to an emergency fund. 

Hays Bailey, the CEO and Founder of Sheqsy , recommends that you also include allocations for expansions or growth if you can see either on the horizon.

7. Review on a Schedule

Review your budget periodically. Track your income and expenses monthly, and update your budget as things change. “Over time, you will gain a better understanding of your company's operations and will be able to make more informed decisions regarding your budgeting plan,” says Hudson.

How to Create a Small Business Budget Spreadsheet in Excel

Microsoft Excel makes it easy to organize and chart your small business budget over time. The following tutorial lays out step by step how to use a template in Excel to add up your income and expenses and determine your business’s cash flow.

Gather and Organize All Relevant Financial Information for Your Business

To start your budget, you will need to gather and organize all of your financial information for the previous period. This includes income statements, expense reports, cash flow documentation, and any other relevant documents. If this is your first budget and you do not have these items, organize your bank statements, invoices, payroll information, and receipts. 

By organizing your data into these documents, each month becomes easier to track than the last. The more you stay organized, the simpler it will be to maintain your budget.

Download a Small Business Budget Template

• Download the small business budget template for Microsoft Excel.

Record Your Monthly Income

Record Your Monthly Expenses

Record Your Cash Flow

Save and Update Your Budget Regularly

Store your budget template on an accessible drive and update it regularly. Small businesses should update their budget and cash flow as often as possible to stay up to date.

Small Business Budget Example

Download Small Business Budget Example Microsoft Excel | Google Sheets

In this example of a small business budget, we’ve listed sample income, expense, and cash flow information using categories that are relevant to a small retail business. This template is fully customizable and can be used for a small business in any industry. You can also download a blank version of this template in the small business budget starter kit below.

Tips for Creating a Small Business Budget

Creating a budget for your small business can be daunting. To help you get started, we’ve gathered expert tips, from finding a mentor to setting realistic goals.

• Be Realistic: Keep all financial estimates in the realm of reality. Use historical financial data from your own past whenever possible. “My best tip is to avoid any wishful thinking or dreaming about best-case scenarios because it’s always better to use the real data from years past and to be realistic — you’ll avoid disappointment and tricky financial situations that way,” suggests Light.
• Note Changing Costs: Products and services don’t always cost the same amount every year. Be sure that the expenses listed in your budget are accurate at all times. “Be very mindful of the rapid rate at which prices can change and to get as many quotes as possible to inform your budget,” says Atiyeh. “On the first of these points, you may incorrectly assume that the amount you paid for a service in the past is still a good indicator of how much it would cost today. However, services are priced based on a multitude of factors, such as demand and market circumstances. Keep this in mind when creating a budget.”
• Find a Mentor: Doing so can cut down on the time it might take you to learn about business budgeting on your own. “Find someone who has experience in making budgets. Making a budget is technical and it requires experience if you want it to be done right. Of course, you are also allowed to do it on your own, but expect that it is going to take time and that you are in for lots of revisions,” warns Bailey.
• Overestimate Your Costs: Overestimating your costs helps ensure that your finances aren’t threatened when surprises come up or projects go over budget. You will be much better equipped to weather financial hardship if you’ve made room in your budget to respond to unexpected changes. “If your company works on a project-by-project basis, you are well aware that every customer is unique and no two projects will be precisely the same in their outcome. It is often impossible to forecast when a project may run over budget,” says Mains. “So much of running a company is about anticipating and responding to the unexpected. For small company owners, failure to predict an expenditure or its scale may be devastating and may cause the organization to become crippled before it has had a chance to mature and develop. Company owners must overestimate their costs to protect themselves from financial risk. This is a survival strategy that will assist business owners to protect themselves against danger and failure.”

What Specific Types of Businesses Should Consider when Budgeting for a Small Business

Budgeting for any business involves adding up income, subtracting expenses, and identifying where to spend and save money. Because different industries require different strategies, we’ve created a list of things to consider for specific small business types.

“One thing that is unique to small businesses as a whole is that there are so many different types of businesses. This means that there is no one-size-fits-all budget plan for small businesses. Each business should tailor its budget plan to its own specific needs and circumstances,” explains Lindsey Hyland, Founder of Urban Organic Yield .

• Seasonal Businesses: Some small businesses, such as those based around holidays or gardening, operate at a much higher business volume at certain times of the year. These businesses need to consider that their busy season will bring in much more income than their slow season(s). One way to tackle this is to take an average of your monthly income for the year and use that as your monthly operating budget. Don’t project based on the biggest numbers — use the smaller numbers or an average. For these businesses, it is especially important to establish an emergency fund so that a surprise expense during the slow season doesn’t become a catastrophe.
• Recruitment and Staffing: Businesses that deal with recruitment and staffing need to have a finger on the pulse of the businesses they work with. Do outside research into the growth or downscaling of other businesses to determine budget numbers for a given period. “Since my company is in the industrial and equipment recruiting industry, one unique challenge that we face is having to incorporate the needs of other businesses into our budget. For instance, it's important that we stay mindful of how much these businesses are upscaling or downscaling their operations at any given time, as that directly impacts the provision of our services,” says Atiyeh.
• E-commerce: Online businesses may have fewer fixed costs, such as rent, but may have more variable ones. Shipping costs, shipping zones, import taxes, and shipping supplies will change based on sales volume, so find an average or inflated number that works for these budget items. Companies that operate exclusively online should also invest in a well-made, working website and have a system in place for potential returns. These two things will help improve remote customer service, which can lead to more sales — and a larger budget — in the future.
• Nonprofits: Not-for-profit businesses are funded in a variety of ways, including through grants, donations, and dues. For these businesses, it is even more important to keep the budget as realistic as possible at all times, as there is commonly less money to move around. For more information and to help keep your budget balanced, peruse our list of free nonprofit budget templates .
• Inventory Business: Remember that it can be very expensive to keep large amounts of inventory on hand. Buying more of a product to sell can sometimes be cheaper because of the economy of scale, but ensure you have the space and capacity to hold on to things that don’t sell right away. Consider that you may need to spend more on rent and temperature control for a place to store these items.
• Custom Orders: The price of a custom order is not only the cost of the finished product, but a combination of factors. Determine a cost for your time and labor for conception, execution, materials, and delivery, and factor those into your expenses.
• Startups: Budgeting for a company with no existing financial history can be tough. Company owners will need to do research on the industry and use those numbers to create a rough estimate for their budget. When you are estimating a budget from scratch, be sure to overestimate your costs to mitigate risks. It is always a good idea to ask professionals and people with experience. Visit this list of free customizable startup budget templates to get started.
• Construction: Construction companies need to factor in the cost of all associated permits and insurance on top of all of the general costs of doing business. Permits and insurances may change based on the specific job you are doing, so it is critical to factor those costs into the relevant monthly budget. To help keep you organized, check out this list of free construction budget templates .
• Service: Businesses based on service need to put a larger portion of their budget toward staff training and retention. Better employees mean better service, and much of an employee's ability comes from their training. Additionally, you do not want to lose the valuable employees you spend time and money training, so these businesses need to factor in rising pay scales for more qualified staff.
• All Small Businesses: Do not forget to factor in taxes and fees involved in running your business. If you don’t know what they are, ask a professional for help. “There are a shocking number of people that do not make any self-employment tax payments to the IRS for lack of fear or know-how,” says Stevenson.

How to Manage a Small Business Budget

Manage your small business budget by spending within your means and saving money where you can. Make sure your budget is as realistic as possible, and update and revise it on a regular basis.

• Spend Within Your Means: Whenever possible, do not spend more money than you make. Use loans and credit wisely so as not to dig yourself into a hole. “Make do with what you have, start small with the free versions of software before you upgrade. Save for equipment. Make room in the budget later if you can’t afford it now,” advises Stevenson.
• Get Multiple Quotes: When you work with other businesses, it is in your best interest to get multiple quotes. You can use these quotes to negotiate the prices of goods or services that you need to run your own business, and save money in your budget. “By getting as many quotes as possible, you can build a more accurate understanding of the true prices of what you'll need throughout the period of time that you're budgeting for. By getting quotes from several sources rather than just one or two, you can make sure that your estimates are fair and accurate,” suggests Atiyeh.
• Revisit Your Budget Regularly: Circumstances can easily change from month to month or year to year. “The best way to stay on budget is to revisit the budget regularly. Budgets shouldn’t be set and then put away, they should be consistently reassessed and adjusted. If you’re committed to tweaking and allowing your budget to evolve with a watchful eye, you’re far more likely to stay within its bounds,” says Light.
• Be Realistic from the Outset: It is easy to get carried away with lofty goals and underestimated expenses. The closer your budget reflects reality, the easier it will be to stick to the plan. “Don’t underestimate expenses just to make your budget look conservative, because a budget that’s unrealistic is so much worse than not having a budget at all. It is misleading and it can cause lots of problems in the long run,” warns Bailey.

How to Do a Small Business Budget Efficiently

There are three key ways to help ensure that you manage your small business’s budget efficiently: Use the tools that are available to you, review your financial data on a schedule, and seek help when you need it.

• Use Software Tools: There are many software tools that can help you to create a budget. Many offer free trials so that you can find the one that works best for you. You may also find that a template suits your needs.
• Hire Help: Consider using the professional services of a financial advisor, or hire an accountant to manage your budget. For many businesses, hiring someone to manage the money is an inevitability that should be considered sooner than later.
• Create a Review Schedule: Small businesses should record budgets monthly. Track and store your monthly budget data so that you can reference it for future months and make changes as needed.

Small Business Budget Starter Kit

Download Small Business Budget Starter Kit

We’ve created this small business budget starter kit to help you get started creating and maintaining a budget. We’ve included a blank budget template from the example above, plus powerful cash flow and income statement templates to help keep you organized and on track. We’ve also included a customizable budget checklist so that you can ensure you’re tracking all of the information you need, every time.

Small Business Budget Template

Download Small Business Budget Template Microsoft Excel | Google Sheets | Smartsheet

Use this blank small business template to calculate your income, expenses, and a simplified cash flow. This powerful template adds up your itemized income and expenses each month, giving you a running total while in progress and a yearly total once completed.

Small Business Budget Checklist

Download Small Business Budget Checklist Microsoft Excel | Adobe PDF | Google Sheets

This customizable small business budget checklist will help ensure that you’ve included all income and expenses in your monthly budget. The checklist includes a list of some of the most common business expenses, but you can edit it as needed.

Small Business Income Statement Template

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this small business income statement template to track your company’s total income and expenses over time. Customize it to track by month, quarter, or year, and use it to complete the income and expense information on your budget template.

Small Business Cash Flow Statement Template

Download Small Business Cash Flow Statement Template Microsoft Excel | Google Sheets

Use this small business cash flow statement template to follow your cash income and expenses. Input your cash flow in the appropriate cell, and compare the current to the previous time period. The template will generate your total cash payments and ending cash position, which will help you fill in your budget template.

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How to Create a Small Business Budget in 5 Simple Steps

Want to protect the financial health of your small business? You need a business budget. Here's how to create one.

When you build a business, there are a lot of things to stay on top of, from marketing and finding new  clients  to building a website and establishing your digital presence. But there’s one element that you want to stay on top of from the very beginning—and that’s your business budget.

Having a detailed and accurate budget is a must if you want to build a thriving, sustainable business. But how, exactly, do you create one? What are the steps for business budget planning?

As a small business owner, let’s take a look at how to create a business budget in five simple, straightforward steps.

What’s a Business Budget—and Why Is It Important?

Before we jump into creating a business budget, let’s quickly cover what a business budget is—and why it’s so important for small businesses.

A business budget is an overview of your business funds. It outlines key information on both the current state of your finances (including income and expenses) and your long-term financial goals. Because your budget will play a key role in making sound financial decisions for your business, it should be one of the first tasks you tackle to improve business success.

And, as a  financially savvy owners, you’ll also want to have a budget in place to help you:

• Make sound financial decisions.  In many ways, your business budgets are like a financial road map. It helps you evaluate where your  business finances  currently stand—and what you need to do to hit your financial goals in the future for business growth.
• Identify where to cut spending or grow revenue.  Your business budgets can help you identify areas to decrease your spending or increase your revenue, which will increase your  profitability  in the process, outline unexpected costs, and help your sustain your business goals.
• Land funding to grow your business.  If you’re planning to apply for a business loan or raise funding from investors, you’ll need to provide a detailed budget that outlines your income and expenses.

Now that you understand why budget creation is so important to your business decisions, let’s jump into how to do it.

Business Budget Step 1: Tally Your Income Sources

First things first. When building a small business budget, you need to figure out how much money your business is bringing in each month and where that money is coming from – this will hep create an operating budget based on your business income.

Your sales figures (which you can access using the Profit & Loss report function in FreshBooks) are a great place to start. From there, you can add any other sources of income for your business throughout the month.

Your total number of income sources will depend on your business model.

For example, if you run a  freelance  writing business, you might have multiple sources of income from:

• Freelance writing projects
• A writing course you sell on your website
• Consulting with other writers who are starting small businesses

Or, if you run a brick-and-mortar retail business, you may only have one source of income from your store sales.

However many income sources you have, make sure to account for any and all income that’s flowing into your business—then tally all those sources to get a clear picture of your total monthly income to build your master business budget template.

Business Budget Step 2: Determine Fixed Costs

Once you’ve got a handle on your income, it’s time to get a handle of your costs—starting with fixed costs.

Your fixed costs are any expenses that stay the same from month to month. This can include expenses like rent, certain utilities (like internet or phone plans), website hosting, and payroll costs.

Review your expenses (either via your bank statements or through your FreshBooks reports) and see which costs have stayed the same from month to month. These are the expenses you’re going to categorize as fixed costs.

Once these costs are determined, add them together to get your total fixed and variable costs expense for the month.

TIP:   If you’re just starting your business and don’t have financial data to review, make sure to use projected costs. For example, if you’ve signed a lease for office space, use the monthly rent you will pay moving forward.

Business Budget Step 3: Include Variable Expenses

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Variable costs don’t come with a fixed price tag—and will vary each month based on your business performance and activity. These can include things like usage-based utilities (like electricity or gas), shipping costs, sales commissions, or travel costs.

Variable expenses will, by definition, change from month to month. When your profits are higher than expected, you can spend more on the variables that will help your business scale faster. But when your profits are lower than expected, consider cutting these variable costs until you can get your profits up.

At the end of each month, tally these expenses. Over time, you’ll get a sense of how these expenses fluctuate with your business performance or during certain months, which can help you make more accurate financial projections and budget accordingly.

Business Budget Step 4: Predict One-Time Spends

Many of your business expenses will be regular expenses that you pay for each month, whether they’re fixed or variable costs. But there are also costs that will happen far less frequently. Just don’t forget to factor those expenses when you create a budget as well.

If you know you have one-time spends on the horizon (for example, an upcoming business course or a new laptop), adding them to your budget can help you set aside the financial resources necessary to cover those expenses—and protect your business from unexpected costs in the form of a sudden or large financial burden.

On top of adding planned one-time spends to your budget, you should also add a buffer to cover any unplanned purchases or expenses, like fixing a damaged cell phone or hiring an IT consultant to deal with a security breach. That way, when an unexpected expense pops up (and they always do), you’re prepared!

Business Budget Step 5: Pull It All Together

You’ve gathered all of your income sources and all of your revenue and expenses. What’s next? Pulling it all together to get a comprehensive view of your financial standing for the month.

On your businesses master budget, you’ll want to tally your total income and your total expenses (i.e., adding your total fixed costs, variable expenses, cost of goods, and one-time spends)—then compare cash flow in (income) to cash flow out (expenses) to determine your overall profitability.

Having a hard time visualizing what a business budget looks like in action? Here’s an operating budget example to give you an idea of what your new business budget might look like each month:

A Client Hourly Earnings: $5,000 B Client Hourly Earnings: $4,500 C Client Hourly Earnings: $6,000 Product Sales: $1,500 Loans: $1,000 Savings: $1,000 Investment Income: $500

Total Income: $19,500

Fixed Costs

Rent: $1,000 Internet: $50 Payroll costs: $5,000 Website hosting: $50 Insurance: $50 Government and bank fees: $25 Cell phone: $50 Accounting services : $100 Legal services: $100

Total Fixed Costs: $6,425

Variable Expenses

Sales commissions: $2,000 Contractor wages: $500 Electricity bill: $125 Gas bill: $75 Water bill: $125 Printing services: $300 Raw materials: $200 Digital advertising costs: $750 Travel and events: $0 Transportation: $50

Total Variable Expenses: $4,125

One-Time Spends

Office furniture: $450 Office supplies for new location: $300 December business retreat: $1,000 New time tracking software: $500 Client gifts : $100

One-Time Spends: $2,350

Expenses: $12,900

Total Income ($19,500) – Total Expenses ($12,900) = Total Net Income ($6,600)

Above all, once you have a clear sense of your profitability for the month, you can use it to make the right financial decisions for your small business moving forward.

For example, if you realize you’re in the red and spending more than you earn, you might cut your spending and focus on  finding new clients . Alternatively, if your income is significantly higher than your expenses, you might consider investing your profits back into your business (like investing in new software or equipment).

Use Your Business Budget to Stay on Track

Putting in the work to create a budget for your small business may seem like a hassle. But while it takes a bit of time and energy, it’s worth the extra effort. Thorough business budgeting gives you the financial insights you need to make the right decisions for your business to grow, scale, and prosper in the future.

This post was updated in October 2023

Written by Deanna deBara , Freelance Contributor

Posted on June 20, 2017

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How to create a business budget

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Key takeaways

• A business budget is a financial plan that helps estimate a company's revenue and expenses, making it an essential tool for small businesses
• The steps to creating a business budget include choosing budget and accounting software, listing expenses and forecasting revenue
• If a business finds itself in a budget deficit, strategies such as cutting costs, negotiating with suppliers and diversifying revenue streams can help

As a small business owner, keeping your finances organized through a business budget is crucial to running a successful company.

Business budgeting involves creating a financial plan that estimates future revenue and expenses to make informed financial decisions, which can ultimately move the needle on your business’s financial goals and help it grow in profitability.

What is a business budget?

A business budget is a financial plan that outlines the company’s current revenue and expenses. The budget also forecasts expected revenue that can be used for future business activities, such as purchasing equipment. It sets targets for your business’s revenue, expenses and profit and helps you determine if you’ll have more money coming in than you pay out.

A business budget is an essential tool that helps you make wise business decisions. Without it, it’s difficult to gauge your business’s financial health.

What is the difference between a cash flow statement and a business budget?

A cash flow statement  (CFS) is a financial document that summarizes the movement of cash coming in and going out of a company. The CFS gauges how effectively a company manages its finances, including how it manages debt responsibilities and funds day-to-day operations.

It’s similar to a business budget in that you can see expenses and revenue. But while a budget gives a moment-in-time snapshot of your business’s financial performance compared to forecasts, the cash flow statement focuses on the actual inflows and outflows of money through your business.

Follow these steps to ensure a well-developed budget, from understanding your expenses to generating revenue and adjusting expenses to balance the budget.

1. Choose a budget and accounting software

First, you’ll want to store your expense and revenue information with accounting software to help you track your numbers and generate reports. Some software may also help you assign categories to the transactions, identify tax deductions and file taxes. Quickbooks is an example of accounting software.

Some business bank accounts also have accounting software built in, helping you stay organized by keeping your accounting and banking in one place.

2. List your business expenses

The next step in creating a small business budget is to list all your business expenses. Here are the types of expenses you want to include in your budget:

• Fixed expenses: Fixed expenses cost a fixed amount monthly or within the assessed period. Those costs include rent, insurance, salaries and loan payments.
• Variable expenses: Variable expenses can change monthly or over time, making them trickier to budget. This might include materials, direct labor, utility bills or marketing expenses.
• Annual or one-time costs: Some costs only occur a few times per year, while others you’ll only pay for as needed, such as buying new equipment. You still want to budget for these expenses by allocating a portion of your weekly or monthly budget toward one-time expenses.
• Contingency funds: Unexpected business costs can throw a wrench in your budget if not planned for. Such costs could include emergency repairs, necessary equipment purchases, sudden tax increases or unforeseen legal fees. To plan for these costs, you can create a contingency or emergency fund that’s separate from your operational budget.
• Maintenance costs: To allocate funds for maintenance costs, begin by including regular inspections and maintenance in your budget. Then, make sure to leave room for changes and unexpected maintenance costs.

3. Forecast your revenue

To estimate your future revenue, start by deciding on a timeline for your forecast. A good place to start is the previous 12 months. Your accounting software may also include revenue forecasting as one of its features, which can automate this step for you.

The timeline and your recent past growth can help you understand how much revenue you’ll generate in the future. Consider external factors that could drive revenue growth, such as planned business activities like expansion, marketing campaigns or new product launches.

You’ll also want to think about anything that might slow your growth. Many businesses experience seasonal fluctuations, which can impact your budget if you don’t plan for it. To account for these changes, list the minimum expenses required to keep your business running. Use your financial statements to understand these costs, and consider averaging out irregular expenses over the year to avoid surprises.

Ideally, your business should build a cash reserve during profitable periods to cover expenses during slower seasons. If necessary, consider various financing options, such as a business credit card or line of credit, that you can draw from to manage cash flow during peak or off times.

4. Calculate your profits

The next step in creating a business budget is to calculate your business profits. You can look at your total profits by calculating revenue minus expenses. That way, you see how much money you have to work with, called your working capital .

You should also understand your profit margins for each of your products and services, which can help you set prices or decide whether to offer a new product or service.

How to calculate your profit margins

To find out your gross profit margin, you’ll first need to calculate the gross profit. To calculate your business’s gross profit, subtract the cost of goods sold (COGS) from your total revenue. COGS includes all the expenses related to producing your products and services.

Once you have the gross profit, use the gross profit margin formula: (Revenue – COGS) / Revenue x 100. This will give you a percentage that shows how much profit you gain from that particular product after accounting for the product’s costs.

5. Make a strategy for your working capital

Knowing what to do with extra revenue, which is your working capital, is crucial for managing your business finances and growth. Here’s how to get started with a financial strategy that propels your business goals forward:

• Set spending limits for different categories in your budget. When listing your expenses, you should have set a dollar amount for each category. You can estimate this by a monthly average or a general forecasted amount.
• Set realistic short- and long-term goals. These goals will motivate you to stick to your budget and guide your spending decisions.
• Compare your actual spending with your net income and priorities. Look at the areas you’re spending and consider whether you need to reallocate money to different categories. Consider separating expenses into business needs and extras.
• Adjust your budget and actual spending. Adjust your spending to ensure you do not overspend and can allocate money towards your goals. If you need to cut spending, consider the categories that are extras, such as types of marketing that you don’t know will generate a return on investment.

6. Review your budget and forecasts regularly

Finally, review your budget regularly. By frequently checking in on your budget, you can identify any discrepancies between your planned and actual expenses and adjust accordingly. This allows you to proactively handle any financial issues that may arise rather than reacting to them after they’ve become a problem.

Regular reviews also allow you to refine your budgeting process and improve its accuracy over time. Keep in mind that your budget is not set in stone but rather a tool to guide your financial decisions and help you achieve your business goals.

What to do if you have a deficit in your business budget

Finding a deficit in your small business budget can be alarming, but there are several strategies you can employ to handle this situation.

• Do a cash flow analysis. Begin by doing a cash flow analysis to review what your business is earning and spending money on. Identify potential problems and adjust the budget as needed to prevent overspending.
• Cut nonessential business costs. Cutting spending may involve eliminating nonessential costs and transferring funds from other categories to overspent categories. Your goal is a balanced or profitable budget.
• Negotiate with suppliers. Be transparent in your communications with suppliers and explain your quality standards and why you’re seeking cost reduction. Explore options for cost reduction that do not compromise quality, such as process improvements or ordering in larger quantities.
• Create a lean business model. By removing anything that doesn’t benefit your customer, your business can potentially save time and resources. Lean business models focus on continually improving processes and customer experience without adding additional resources, time or funds.
• Add revenue and diversify revenue streams. Raising revenue requires a realistic plan with measurable goals to increase sales and overall business income. You can also consider other products and services you could offer that would make your business profitable.
• Use financing to cover temporary gaps. Applying for a small business loan can help pay bills during an unplanned shortfall. Since this will add an expense to your budget, make sure you can handle the loan repayments and your regular expenses.
• Plan for a deficit. In some cases, a planned budget deficit might be a strategic decision, such as investing in new opportunities that promise long-term benefits.

Bottom line

Having a well-developed business budget is crucial for making informed decisions. You can effectively manage your small business’s finances by tracking and analyzing your business’s inflows and outflows, forecasting your expected revenue and adjusting your budget to stay balanced.

Even in the face of a budget deficit, there are various strategies you can use to keep your business profitable, including negotiating costs with your suppliers, assessing your business operations and offering new products and services.

With a solid business budget in place, you can confidently navigate financial challenges and drive long-term success for your small business.

Frequently asked questions

What are the benefits of a business budget, what are the components of a business budget, how do you calculate fixed and variable costs in a business budget.

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6 Steps to a Better Business Budget

A top-notch budget can help propel your business success

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

You've just purchased or opened a small business and you know your trade. But when it comes to bookkeeping—and more specifically, budgeting —your skill set is lacking. The good news is that it is possible to come up with a budget (or at least a good estimation of what will be needed in terms of dollars and cents) fairly easily.

Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business, and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in, or conversely, not spending enough money to grow the business and compete.

Key Takeaways

• A business budget helps owners determine if they have enough money to fund operations, expand, and generate income.
• Without a budget, a company runs the risk of spending money it doesn't have, not spending enough to compete, or failing to build a solid emergency fund.
• To create a budget, check industry standards to determine the average costs of doing business and create a spreadsheet estimating the amount of money you'll need to allocate toward your costs.
• Factor in some slack in your budget to cover unexpected costs and review areas where you could cut costs if times get tough.
• Review your budget every few months and shop around for new suppliers to save money on products or services for your business.

Getting Started With a Business Budget

Every small business owner tends to have a slightly different process, situation, or way of budgeting. However, there are some parameters found in nearly every budget that you can employ.

For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold (COGS) expenses (raw materials), interest, and tax payments. The point is every business owner should consider these items and any other costs specifically associated with the business when setting up shop or taking over an existing business.

With a business that is already up and running, you can make assumptions about future revenue based on recent trends in the business. If the business is a startup , you'll have to make assumptions based on your geographic area, hours of operation, and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other businesses that are for sale and asking questions about weekly revenue and traffic patterns.

After you've researched this information, you should then match the business's revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, you may then be able to estimate or forecast whether you'll have enough extra money to expand the business or to tuck away some money into savings. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week.

These six simple tips will help you put together a top-notch small business budget:

1. Check Industry Standards

Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the internet for information about the industry , speak with local business owners, stop into the local library, and check the Internal Revenue Service (IRS) website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings.

Small businesses can be extremely volatile as they are more susceptible to industry downturns than larger, more diversified competitors. So, you only need to look for an average here, not specifics.

2. Make a Spreadsheet

Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc. It's also important you understand the different types of budgets you'll need to set up for your small business and how to implement them.

3. Factor in Some Slack

Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money socked away (or coming in) before expanding the business or taking on new employees.

4. Look to Cut Costs

If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost-cutting . Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much-needed breathing and expansion room.

5. Review the Business Periodically

While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile, and unexpected expenses can throw off revenue assumptions. Establishing a budget planning calendar can be an effective tool for business owners to ensure they have enough capital to meet their business needs.

6. Shop Around for Services/Suppliers

Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

The Bottom Line

Budgeting is an easy, but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.

University of California, Irvine, Accounting & Fiscal Services. " Understanding Fiscal Years and Fiscal Periods ."

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A How-To Guide for Creating a Business Budget

Creating a business budget allows businessmen to find whether their business will have enough revenue to pay off expenses in the future. A perfect budget acts as a root map for a company to ensure that they are proper and are on track with the budget.

A business budget helps firms manage their money efficiently. Preparing a budget to track actual revenue and spending throughout the accounting year helps gain greater control over the expenses. It helps everyone in an organization to work according to a proper plan and manage the expenses of the company.

What is a Business Budget?

A business budget is a detailed plan that states where the company will spend its money. Preparing a budget will allow the company to weigh down its expenses and benefits before committing assets . It also gives the business an idea as to how its future will look like.

Typically a business budget is prepared on an annual basis. But, if required it can also be prepared monthly or quarterly. It is a detailed plan which outlines how, when, and where you are planning to spend your money. A business budget helps the business to keep its costs under control and grow according to the plans.

Creating a perfect business budget helps firms eliminate their wasteful spending, develop plans to expand revenue, and work towards setting productive goals. Proper planning must include an outline of changes that a firm needs to make, potential changes of the market and clients, changes in the competition, operational changes if any, financial performance, investment details, etc.

Purpose of Business Budget

A good business budget serves as a benchmark for the firm to make sure that they are on track with its goals. It is an important instrument that can activate change. A budget can help to ensure the long-term success of your business. Certain points make it a necessity. The purposes of a business budget are as follows:

Forecasting the Earnings of a Business:

Creating a good business budget helps to estimate how much money the business will be able to make in the future as revenue, sales, and profit.

Plan the Expenditure:

Budget acts as a way to assign each job to the business spending so that there will be no unnecessary reason to spend money. Each penny spent will have a reason that eliminates wastage of money.

Holds Yourselves Accountable for Fluctuations:

A budget lets you evaluate the money planned to be spent with the actual money used. This helps you see if you are meeting the desired goals and have achieved the forecasted expectations.

Helps Prepare for Emergencies:

You never know what will come up during the life of a business and so it is always important to plan for the uncertainties in the business. A business budget can help you set aside some money to be used at the time of emergencies.

Attracts Investors Towards the Business:

Investors will need to see how their money will be used in a company. A well-prepared budget will show how a business is organized and committed. This helps the investors to analyze whether their money is used properly.

Helps to Allocate Resources:

Allocating business resources is one of the most critical purposes of preparing a budget . Therefore, it is important to differentiate between needs and wants. Budget planning can help to allocate new funds, reallocate existing funds, or change policies, practices, and priorities.

Steps to Create a Business Budget

Having a realistic business budget can act as a tool to help businesses to minimize cost issues, improve focus, and help efficiently use cash. Before focusing on the preparation of the budget, identify which aspects of the business needs improvement. This helps to decide how the business funds must be used. Based on this setup long and short-term goals are practical and purely based on the capacity of the firm to spend and save. Below are some steps that will help you get an idea of how to create a business budget.

Find Out the Sources of Income:

Do not overestimate the revenue this will lead to borrowing more cash to meet the operational needs of the company. It is better to refer previously recorded revenue of the company this will help to keep things realistic. Find out how much and from where the money is coming into the business. It is made on a monthly, quarterly, or yearly basis. Examine how your monthly income is fluctuating over time and look for seasonal patterns if any. A better idea about these changes will help you prepare for the bad income months by keeping small balances for emergencies.

Determine the Fixed Costs:

After finding out the incomes, it is time to get a hold on the costs of the business. For this start with the fixed costs. Fixed costs are those costs that do not change over time. For example, rent, salaries, tax rates, insurance policies, interest expenses, etc. Review these expenses and see which of them have stayed the same for each of the months. Add all the fixed costs together to get the total fixed costs that are incurred in the business.

Find Out the Variable Costs:

Variable costs are those costs that do not remain fixed and keep on changing month after month. These are the expenses that change in proportion to the production, output, sales, or usage. For example, owner’s salary, office supplies, piece-rate labor wages, commission, etc. When the business is having higher profits than expected then spend more on variables that will help scale up the business. On the other hand, when the profit is lesser than expected, consider cutting the variable costs until the business profit starts increasing.

Calculate One-Time Spends:

One-time spending is those expenses that come into a business without any notice. For example, expenditures incurred to rectify security breaches of computers in an IT company. These arise when you least expect them, and usually, businesses do not have money to settle these expenses. To prevent the fear of unexpected costs make sure to keep some extra money ready with you, this amount of money acts as a financial cover and protects your business from sudden and large financial burdens.

Bring Together All the Above 4 Stages Above:

After gathering all the required information regarding the incomes and expenses of the business, the next step is to create a forward-looking budget. A good budget balances a firm’s total income against its total expenses. For this purpose add all the fixed costs, variable costs, and one-time costs together. Then deduct the total from the total income. This will help to determine the overall profitability of the company.

Importance of a Business Budget

Creating a perfect business budget helps firms to understand how much income they have gained and how much did they spend. It also, helps the firms get an idea about the amount of money they will need in the future. An efficient budget can help businesses to make important decisions like cutting down unwanted expenses, hiring new staff members, purchasing new equipment, etc.

A business budget is a basis for the success of an organization. The following points will help you understand that a budget is an important element of the business.

• Controls finances of a business by estimating revenue, planning the expenditure, and restricting any unwanted spending
• Helps plan short-term and long-term goals for the growth of an organization
• It helps to know the financial health of the business
• It allows developing strategic plans for business expansions. Assists in preparing income, sales, and payroll taxes
• Attract people to invest in your company as a budget helps showcase where the money will be invested
• By having well-organized budgeted information, you can create accurate financial records

Different Types of Business Budgets

The final budget of a business is typically a blend of inputs from different other budgets developed at departmental levels. Below are the types of business budgets prepared by a company for its smooth functioning.

Master Budget

The master budget refers to a collection of lower-level budgets and is created by different organizational levels in a company. Management makes use of the budget to plan activities that are needed to achieve organizational goals. This budget uses data from cash forecasts, financial statements , and financial plans.

Operating Budget

An operating budget is an in-depth forecast of all expenses and revenues that a firm expects to get over a while. Firms usually formulate an operating budget at the end of the year to show expected activities during the subsequent year. It consists of fixed, variable, capital, and non-operating expenses. This information from this budget can be used to ensure whether the firm’s spending is according to the plans.

Cash Budget

A cash flow budget is an estimation of all cash receipts and payments that are anticipated to arise during a certain period. The estimates are made on a monthly, bimonthly, or quarterly basis. This budget is used to evaluate whether the company has required cash to continue its functioning throughout a given time frame. It helps determine the efficient allocation of cash.

Financial Budget

A financial budget refers to determining how much capital a firm will need to attain its long-term and short-term goals. The purpose of preparing a financial budget is to estimate the company’s cash, capital expenditures, and balance sheet items, including assets, liabilities, and owner’s equity. It gives an overall idea of the health and stability of your business.

Labor Budget

Businesses can find out how much it will cost to achieve the required goods production or service goals, both in financial and actual labor terms. Whenever a company is, planning to hire a new employee, they should consider creating a labor budget to determine how many laborers are required to achieve certain production levels.

Static Budget

Refers to a budget that incorporates the values of inputs and outputs that are conceived. It does not change throughout an accounting year. Usually prepared by nonprofit, educational, or government organizations who allocate a fixed sum to be used to undertake their activities. This budget is used to meet goals irrespective of any sales increase or decrease.

How Can Deskera Help You With Accounting of Your Expenses?

To make accounting of your business and expenses a hassle-free process, you should use Deskera Books . Deskera Books is online accounting software that will make your processes of financial reporting , budgeting and auditing easier, faster, and more efficient.

Deskera Books also comes with pre-configured tax codes, accounting rules, and charts of accounts. This will make sure you do not miss out on the benefits from tax-deductible expenses. Additionally, it will keep track of all your expenses and keep your financial statements and financial KPIs updated in real-time.

Lastly, you can even make your bookkeepers or accountants, or CPAs a part of your Deskera Books account by giving them access through an invitation link.

Key Takeaways

A business budget is a detailed plan which states where the company spends its money. These are detailed plans outlining how, when, and where you spend the business income and are prepared on a monthly, quarterly, or yearly basis.

Purpose of business budget:

An efficient budget acts as a road map for the business and helps gain control over its expenses. Below are some points that make it a necessity.

• Forecast earnings of the business
• Plan business expenditure
• Help businesses prepare for emergencies
• Attract investors towards the company
• Helps to allocate resources

Steps to create a business budget:

Business budget acts as a tool to help businesses minimize cost issues, improve focus, and help efficiently use cash. Before focusing on the preparation of the budget, identify which aspects of the business needs improvement. It helps decide how business funds should be utilized. The steps are as follows:

• Finding out the sources of income of the company
• Determine fixed costs of the business
• Finding out variable costs
• Calculate one-time spending of the firm, if any
• Bring together all the incomes and expenses identified in the above 4 stages

Importance of a business budget:

Creating a perfect business budget will help firms understand how much income they have gained and how much they spend. It is a basis for every company’s success. Below are some of the points why a firm must prepare a budget.

• Helps to plan and control the finances of the firm
• Control unwanted spending
• It Helps set group objectives towards which the business needs to work
• It helps in strategic planning
• Attracts investors to invest in the firm
• It creates accurate financial records
• Helps in strategic planning
• Creates accurate financial records

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The Complete Guide To Business Budgeting and Budget Management

Running a business without a budget opens oneself up to a host of financial problems, including failure. But what is a business budget and what does budgeting mean?

At its core, a business budget lets companies know how much money they have, how much they’ve spent, and how much they need for future initiatives. With budgeting, business owners can stay out of debt, reduce costs, earn profits, and make decisions aimed at growing their business. This is true for both large and small businesses.

This article takes a deep dive into business budgets, types of budgets, the meaning of budgeting and why it is essential business practice. 

What is a business budget?

A budget is a detailed, formal spending plan for a business for a specified time period (a month, quarter, or year). It is a forward-looking document estimating a company’s expenses and revenue within that period. A budget provides the necessary information for a business to fund and fulfil its commitments and make a profit while making sure it has money left over for unexpected expenses and future ventures.

Components of a budget

Understanding a business budget requires a clear understanding of its components: ‍

‍ This is the projected income from sales, investments, or other sources. This estimate is usually based on past financial records or, in the case of a new business, from the revenue of rival companies. While estimating revenue, it is important to take note of lean periods when business and revenue are down and factor in a financial cushion to tide over them. ‍

2. Expenses

‍ This component is split into:

• Fixed costs , or expenses that remain constant, such as rent, lease, utilities, salaries, insurance, legal and accounting fees.   
• Variable costs , or production-dependent fluctuating expenses, such as raw material prices, labour costs, packaging charges, shipping and transportation fees.  
• One-time expenses , such as money spent on a new building, furniture, equipment, software, or product patent.

‍ This is what is left after subtracting estimated costs from revenue. Profit is key to making  investment decisions. ‍

4. Cash flow

This is money that flows in (income) and out (expenses) of a business and helps companies predict future earnings. It is important to know not only how much money is coming in or going out but also when (peak and lean seasons) to make the right projections.

Some people might confuse a business budget with a cash flow statement because both track how money travels in and out of a company. The difference is that a cash flow statement is a summary of the movement of money while a budget serves a greater purpose as a tool for decision-making.

Types of budgets

There are different types of budgets in use, depending on the size, resources, and market position of businesses. A company typically has a Master Budget , which presents a broad overview of its finances. Within the Master Budget are multiple lower-level budgets.

Budgets might be specific to a department, subsidiary, or project. Depending on the time frame, they can also be long-term or short-term. Annual budgets are the norm but many companies also have monthly and quarterly budgets. Similarly, a business can use a long-term budget to plan financial goals three, five, or even 10 years down the line.

Then there are static and flexible budgets. With fixed revenue and expense estimates, a static budget isn’t affected by ups and downs in sales. It is mostly used by organisations with fixed funds, such as government agencies and non-profits. A flexible budget, on the other hand, adjusts to changes in production and sales volumes or external economic factors. It is ideal for businesses that are new or seasonal or have varying income.

What does budgeting mean?

A search online will result in various budgeting meanings. But to put it simply, budgeting is the process of preparing and using a budget. It is also called budget management or spend management . Budgeting means analysing data specific to the business as well as historical and current market trends to make informed business decisions. These decisions can range from the marketing strategies to be deployed for a venture to plans to expand the business into overseas markets. For small businesses, intelligent budgeting helps them use their modest financial resources to make the most of a business opportunity.

Five stages of budget management

1. financial analysis.

‍ Budget planners must have keen analytical skills to ensure projections are accurate and goals realistic. By researching company records and market conditions, they must accurately determine the company’s financial health and use that knowledge to make good business decisions.

2. Financial forecasting

‍ Financial forecasting helps companies predict their performance in a pre-determined future by providing valuable insights into, say, areas where they might incur extra expenses or where investments should be added or removed altogether. ‍

3. Budget preparation

‍ At this stage, a company determines its revenue, expenses, and profit, breaking these down by month, quarter, and year. It also sets goals and takes important decisions (such as identifying high-priority goals and projects that require maximum funding). It is good practice to set aside an emergency fund to account for unexpected challenges.

4. Budget implementation

‍ Many businesses fail to do this as they find their budgets restrictive. However, they must remember that a budget improves financial control. If a company struggles to implement its budget despite having the will to do so, it might be because the spend management plan has shortcomings that need to be examined.

5. Budget evaluation

‍ Companies mustn’t forget to go back to their budgets periodically to check if the actual numbers match the projections. This will lead to necessary revisions and keep the budget relevant. Regular reviews also ensure budgets change with the way a business evolves.

Components of a growing company’s budget

At the top is the Master Budget, which has two components, the Operating Budget and the Financial Budget. These, in turn, are broken down into sub-budgets:

1. Operating Budget

‍ It presents an overview of a company’s projected income for a period, usually up to a year. Its objective is to set financial goals and check the results. An operating budget can be created every month or quarter and relies on the following sub-budgets:

Sales Budget

‍ It lists the expected product units, per unit price, and total revenue expected from their sale. To arrive at these estimates, budget planners depend primarily on feedback from salespeople and to a lesser extent on other information sources such as the state of the economy and pricing policies. The Sales Budget – also called a Sales Forecast or Revenue Budget – is the first step in preparing the Master Budget.   ‍

Production Budget

‍ The next step is to determine the number of product units to be produced, taking into account the number of units already in stock and the final number that is needed. This is the only budget to be stated in unit terms instead of dollar terms. Companies use the Production Budget to adjust production levels. 

Direct Materials Purchases Budget

‍ Next comes the materials purchase budget, which states how much additional raw material is required to produce the projected number of items and how much this will cost.

Direct Labour Budget

‍ Production requires manpower and the labour budget specifies the number of work hours and workers required and their cost.

Overhead Budget

‍ Excluding direct materials and direct labour expenses, the Overhead Budget accounts for all other production-related costs – for use of machinery, equipment and factory premises; for indirect materials such as machine parts and safety devices for workers; for indirect labour such as supervisors and security wages; and compliance charges related to government regulations on safety, emissions, and hazardous material.

Administrative Expenses Budget

‍ It details the administrative expenses related to the production and sale of goods, such as employee salaries and benefits, taxes, expenses associated with buying office supplies and hiring professional advisors and consultants, and so on.

Ending Finished Goods Inventory Budget

‍ It helps set the per unit product price based on material, labour, and overhead costs.

Cost of Goods Sold Budget

‍ This budget details direct expenses incurred on producing a company’s goods. It includes direct costs for raw materials and labour and excludes indirect expenses such as those associated with distributing the goods or hiring sales personnel to sell them.

Budgeted Income Statement

‍ Combining information provided in the eight sub-budgets, this is a statement of a company’s net income – the earnings left after deducting the cost of goods sold, other expenses, taxes, and interests – for the budget period.

2. Financial Budget

‍ The second component of the Master Budget, the Financial Budget serves as a strategic plan for managing a company’s assets, liabilities, income, expenses, cash flow, and investments. It helps companies arrive at their net profit (earnings minus operating costs, taxes, and interest) at the end of the budgeting process. The Financial Budget is mostly used by larger firms to carry out long-term plans, but it can be invaluable to small and growing businesses as it presents a clear view of their financial resources, which can greatly help in decision-making. Like the Operating Budget, the Financial Budget is split into sub-budgets:

Capital Expenditures Budget

‍ It is a list of expenses incurred on the purchase and maintenance of fixed assets such as machinery, equipment, and plants. Most small and growing businesses don’t own their own factories and, therefore, have conservative capital expenditures. A typical Capital Expenditures Budget for a growing business might include money spent on buying software or leasing equipment.

Cash Budget

‍ This is of special interest to small and medium businesses, which typically operate on cash. Usually prepared on a monthly basis, a Cash Budget tells companies how much money they have (net working capital) at the month-end. They also pinpoint areas where the company might be overspending or underspending. 

Budgeted Balance Sheet

A statement of expected assets and liabilities at the end of the budget period. It is drawn from information provided in the Capital Expenditures, Cash, and Operating Budgets.

Additionally, many growing businesses have department-specific budgets such as an IT budget (hardware, software, personnel, outsourcing costs), HR budget (recruitment, training, learning and development, salaries and benefits), and a marketing budget (advertising, social media, and website development).    

Develop your business budget with our monthly budget Excel template

Now that we’ve covered the components of a business budget, learn to make one for your small business. This monthly budget Excel template is the perfect place to start. Input your own data into the budget template to turn it into a customised spend plan for your future endeavours, whether it is increasing sales or launching a new product. Need a marketing budget template on the double? This easy-to-use Excel template can be your guide to creating the perfect business budget. 

5 budgeting benefits for small businesses

1. meeting financial goals.

‍ All companies have financial goals – from cutting costs to increasing investments. Attaining its financial goals means a company has succeeded. But without a budget, it might not know if these goals were fulfilled at all. Another way budgeting helps businesses set and achieve goals is by replacing guesswork with accurate information and insights, maybe about opportunities waiting to be explored that they didn’t know about.

2. Ready for emergencies

‍ In business as in life, one must plan for the unexpected. Budgeting does just that. Take the Covid-19 pandemic, which saw scores of businesses shut shop. Those that survived probably had a little fund cushion to fall back on. As previously mentioned, setting aside a contingency fund is crucial in budget management. It can help companies tide over emergencies like economic recessions and even the general unpredictability of running a small business.

3. Planning ahead

‍ Running a business without a budget is like flying blind. Not knowing where its money is coming from or going can make companies incapable of making long-term commitments to customers/suppliers or taking advantage of opportunities. It can also deal a death blow to expansion dreams. Surely, no small business wants to stay small forever. ‍

4. Being debt-free

‍ With few financial resources, small companies rely on external funding to keep the business running. Failure to pay their debts can lead to loss of reputation and shut down funding avenues. To avoid this fate, businesses must meet monthly or quarterly repayment obligations and set these in their budget management plans.

5. Better decision-making

‍ To make any business decision, an organisation needs to know how much money it can allocate for that purpose. For instance, can it afford to offer employees a raise or hire advisors to improve productivity? With the clarity a budget provides, such decisions aren’t that difficult to make. From wise allocation of resources to knowing the right time to scale up operations, small businesses have much to gain from the improved decision-making budgeting brings.

5 risks of not having a budget

1. spending money you don’t have.

‍ Budgets help businesses forecast spending, keep up with payments, manage cash flow smoothly, and inject efficiency into expense management (employee-initiated expenses). Without a budget, a company might be spending money it doesn’t have, resulting in debt and worse.

2. Denial of funding

‍ Banks and other financial institutions won’t lend to a company unless it has a budget detailing where the funds will be invested and how revenue will be raised to repay the debt. For the same reason, investors won’t put their money in a business unless they see a spend management document. For small businesses, a lack of funding doesn’t just put the lid on expansion plans. It could very well put the survival of the business on the line. 

3. Poor product pricing

‍ Companies price their products on the basis of what they need to spend to produce them. Without the accurate cost estimates budgeting provides, they might not be setting optimal prices for profitable products. Or, they might be wasting their resources on products with insignificant profit margins.

4. Failed commitments and unhappy clients

‍ Without proper spend management, small businesses may run out of funds and fail to deliver on their commitments, leading to unhappy clients who won’t think twice before moving to more competent rivals. Such a loss of reputation can be permanently damaging for small companies and start-ups. 

5. Helpless in changing conditions

‍ Doing business is fraught with challenges and changes. It isn’t possible to predict every change but a budget gives businesses the flexibility to adjust quickly – perhaps, by cutting costs in the face of a sudden dip in sales. On the other hand, the absence of a budget makes businesses less agile and incapable of adapting to change.

How budgeting works – the methods

Are you a start-up, a small business, or a large corporation? The size of a business is one of many factors determining what budgeting methodology works best for you. Others include spend patterns, sales performances, and scale of resources.

• Incremental budgeting: This involves adjusting your previous budget by an increment or percentage to arrive at your current budget. It suits established businesses with historical data and companies whose funding patterns aren’t subject to sudden changes. Incremental budgeting is easy, uncomplicated, and common practice. But it can promote unnecessary spending and doesn’t account for external factors (changing market conditions). ‍
• Zero-based budgeting: Here, a business creates a fresh budget from scratch, assuming it begins at zero. Each dollar requested must therefore be justified. Zero-based budgeting is ideal for companies of all sizes, but particularly for those that want to focus on specific goals. It ensures resources are allocated efficiently and unnecessary expenses curbed. However, the process can be time-consuming. ‍
• Value proposition budgeting: This method lies midway between incremental and zero-based budgeting. It determines whether the value created from a product for the company and its stakeholders, including customers, justifies the cost of producing it. By helping companies prioritise products with high customer value, it helps reduce unnecessary expenses. As such, it is considered a good fit for small businesses. ‍
• Activity-based budgeting: It analyses activities – any activity that incurs a cost – to predict expenses. With activity-based budgeting, companies can pinpoint where each dollar goes, making it easier to cut costs where feasible and predict how much profit can be earned. On the flip side, this type of budgeting is time-consuming, expensive, and requires expert analysts. It is commonly used by large companies with considerable revenue. ‍
• Cash flow budgeting: As the name suggests, this method estimates how much cash flows in and out of a business over a specific period. This insight helps businesses use allocated funds wisely, ensuring there is enough to maintain day-to-day operations and also a little left over at the end of the budget period. Cash flow budgeting is suitable for all businesses, but it might be difficult for companies with thin profit margins. ‍
• Surplus budgeting: This comes into play when the estimated revenue exceeds total expenditure, resulting in a surplus. Surplus budgeting helps companies make prudent use of this surplus – for example, should it be used to grow the business or put aside for use during an emergency?

Budgeting methods can also vary according to the type of accounting used:

• Cash accounting: This method records income only after it has been received in the company bank account and expenses after the money has left the account. ‍
• Accrual accounting: Here, revenue is recorded when it is earned, not when it enters the bank account. Similarly, expenses are recorded when they are billed, not when money leaves the account.

Principles of successful budgeting

To come up with a well-thought-out budget, business owners must stand by these principles:  

Be realistic

‍ Set goals that can be reasonably achieved. Similarly, make sure the company doesn’t overestimate its projected income. Inaccurate projections not only cause operational problems but also harm a company’s credibility.

Be flexible

‍ Running a business can be unpredictable and budgets should be built to adapt to changing conditions. Whether it is an unexpected spike in raw material prices or a sudden shortage of shipping containers (which much of the world witnessed in 2021), make sure your budget has the elbow room to account for the unexpected. Again, earmarking savings for an emergency fund should be a golden rule of budgeting, if it isn’t already.

Be accurate

‍ A budget must be accurate when it comes to tracking expenses – especially purchases made in cash, which are often the biggest source of budget leaks. A budget that doesn’t account for every dollar will present a distorted expenditure estimate, which can endanger the entire budgeting process.

Be inclusive

‍ When a company holds its employees responsible for results, it should also include them in budget preparation and seek their opinion at the goal-setting stage. By incorporating their work experience and knowledge in the budget, employers can significantly increase their chances of success and boost their commitment to work.

Hold regular reviews

‍ Weekly, monthly, quarterly or yearly, a company’s financial goals and budgets must be revisited periodically to ensure the results match the projections. The review process should be standardised and a team set aside for it. Evaluations require manpower, time, and effort, but they are the only way to ensure the budget is fulfilling its function.

Be a budgeting pro with Aspire

Budgeting for business can be difficult, but Aspire can help you take effective control of your company spend. In tune with the industry best practices stated in this article, our budgeting solutions include:

• Spend limits and notifications to prevent overspending
• Real-time visibility into all company expenses
• Delegation of budget owners within teams for better accountability
• Automated receipt reminders, seamless uploading, and easily available transaction records
• Integrated accounting software for error-free transactions
• Interest-free credit for all those times you need ready cash. 

Click here to get started or to speak with an expert.

‍ Download this article as an e-book:  The Complete Guide to Business Budgeting and Budget Management

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Creating a Budget for your Small Business 6 Steps Guide

Free Startup Costs Worksheet

Rudri Mehta

• January 17, 2024

Starting a new business requires lots of effort, and it can be stressful, especially when you don’t have a clear picture of your small business budget. Setting a limit or planning your expenses will streamline your financial management.

But, how do you plan your costs before you incur them? Your small business budget is the key to estimating your expenses and considering that as a benchmark to plan further expenses for your business.

The article explains all you need to know about a small business budget, why it is essential for your business, and a six-step guide that will help you create your business budget efficiently.

So, let’s begin with understanding the business budget.

Table of Contents

What is a Business Budget?

Why is small business budget important.

• Create a Powerful Budget for Small Business

Stay on Top of Your Business Budgeting

Your business budget is est the income you will generate and the expenses you will incur for the next financial year. It considers how much you have spent in the past year or months and how much you will need to spend in the coming months to generate revenue.

However, you won’t have historical data if you have just started your new business. Hence, you have to estimate your expenses based on how much revenue you are targeting for the next financial year and how much costs you will need to incur to generate the revenue.

So, why do you need a business budget? Let’s understand its importance and see why you should have a small business budget.

• Helps in business planning: Your business budget will help you in your business planning and streamline your business finances more effectively.
• Helps in estimating profits or losses: It will also help you understand how much revenue you will generate and how many expenditures you have to make. Based on the predictions, you will know whether you will make a profit or loss in that financial year.
• Effective decision-making: The budget will also serve your purpose of making better decisions as you will have an estimate of how much you will spend and earn, so you will be in a better place to make business decisions.
• Raise funds: A substantial business budget will also help raise funds, since you must show future financial roadmaps to potential investors.

Hence, be it your business planning or raising funds, your business budget will gauge you a fair idea of the financial health of your business.

Let’s understand the comprehensive guide on creating a budget in six simple steps.

6 Steps to Creating a Powerful Budget for Small Businesses

Although creating a small business budget is not rocket science, you must estimate your expenses carefully and predict your revenue.

The business budget becomes challenging when you prepare your budget for the first time with no past figures. Below is a six-step guide that will help you prepare your small business budget, whether you are preparing it for the first time or not.

1. Calculate and List Your Revenue

To prepare a budget , you should start with the income side of the income statement , and you need to estimate your revenue for the next financial year. If you are selling multiple products or providing services, you need to list how much income you will generate from each product and service.

For example, suppose you expect to sell 10,000 units of wooden chairs in a year. In that case, you can consider the total revenue of the 10,000 chairs for the next financial year as revenue before deducting any expenses from the income.

Because if you deduct expenses from the income, it will give you profit or loss; hence, you are required to consider only total business revenue from various sources.

2. Club Your Fixed Costs Together

Your fixed costs remain fixed no matter how much revenue you generate or how many products you sell. These expenses are predictable and include annual rental expenses, loan repayment amount, depreciation costs, insurance expenses, etc.

To estimate your fixed costs for your business budget, you need to list all fixed costs that you will incur in the next financial year. Different businesses will have different types of fixed costs; for example, if you are in the manufacturing business , your fixed costs will include the following costs:

• Factory rent
• Direct wages
• Direct material costs
• Factory electricity
• Depreciation of the plant and machinery
• Factory insurance

Thus, it would help if you considered fixed costs applicable to your business, as it varies depending on your industry.

3. Add Variable Costs

Your business will have many variable costs , which are not fixed. The variable costs are those expenses that will differ depending on how many units you produce or how your business performs.

For example, the fuel expense of your business vehicle is a variable cost because it will vary depending upon its usage. Thus, these are the costs that change every month.

You need to add your variable business costs to your fixed costs to estimate total expenses for your business.

4. Predict any Contingent or One-Time Expense

Your one-time expenses may include buying an office or machinery for your business. The contingent expenses are those that you are unsure of their occurrence. These expenses may incur due to the occurrence or non-occurrence of an event.

For example, you expected your machinery maintenance costs would be $900, but you had extremely high costs on machinery ($2000) as you faced a machinery breakdown that year.

Now, you can not predict such expenses, but must prepare certain funds to meet costs during unexceptional circumstances.

5. Create Your Profit and Loss Statement

Once you have gathered all your business revenue, fixed costs, and variable costs, including contingent expenses, you need to prepare a profit and loss statement that will help you understand how much profit or loss you will make in the next financial year.

You need to add all incomes and deduct all costs from your estimated income. You may have a positive or negative amount as a result. If you get a positive amount, you will make a profit per your business budget.

And, if you get a negative amount, your budgeted revenue and costs will incur a loss for you. Moreover, you can’t stick to your budget 100%, but it will give you an idea of whether you are going in the right direction or not.

6. Prepare a Business Budget

That’s it. Now you are ready with your business budget. You just need to prepare a budget table, as shown in the example below, and you will have your small business budget ready to help you plan your business activities more efficiently.

Business Budget Template

Thus, the template shows how much this business will make revenue from the sales of products A and B and how much fixed, variable, and one-time expenses this business will incur.

If you are still, confused about how to create a budget, then you can leverage the best business budgeting software , and make the budget super smoothly.

Thus, creating a small business budget may seem stressful when you have a lot of other work to focus on. However, with the right approach, you can make your business budget efficient and make it work for your business planning and better decision-making.

Automate preparing your small business budget with Upmterics , where you will get customized business budget templates to suit your industry. The financial forecasting and business planning software can do all the business finance management for you.

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About the Author

Rudri is a passionate financial content writer and a Chartered Accountant by profession. She enjoys sharing knowledge through her writing skills in finance, investments, banking, and taxation while also exploring graphic designing for her own content.

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Business Budget Essentials: Strategies for Financial Success

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• Bookkeeping
• Business Operations
• Starting a Business

A business budget is an essential tool for any company, regardless of its size or industry. It serves as a financial plan that estimates future revenue and expenses, helping businesses stay on track to meet their financial goals. By creating a detailed and accurate budget, companies can effectively allocate resources, control costs, and foresee potential financial challenges, thus ensuring smooth operations and overall success.

Understanding the basics of business budgeting is crucial for any entrepreneur. To set up a business budget, you must first gather financial data, establish revenue and expense categories, and project cash flow based on historical trends, anticipated changes in the market, and other relevant factors. Regular review and adjustment of the budget is also essential, as it helps identify potential discrepancies between projected and actual figures, allowing for timely corrections and adjustments in strategy.

Key Takeaways

• A business budget is a vital financial plan for predicting and managing expenses, revenue, and profits.
• Setting up a budget entails gathering data, categorizing revenue and expenses, and projecting cash flow.
• Regular budget review and adjustment help businesses stay on track to meet their financial goals.

Understanding Business Budgeting

The purpose of a business budget.

A business budget is a crucial financial tool that enables businesses to strategically plan their income and expenses over a specific period of time. A well-prepared budget helps in determining the available funds, allocating resources effectively, and identifying potential problems early on. The primary goals of business budgeting include tracking the company’s financial performance, managing cash flow, and ensuring long-term financial stability.

Business budgets are also essential for forecasting revenue and setting financial targets for the business. By comparing actual financial performance with the budget, businesses can evaluate their progress and implement improvements or adjustments if needed.

Key Components of a Business Budget

• Revenue : This is the projected income a business expects to generate from sales, investments, or other sources during a specified period. An accurate revenue estimate is critical for creating a realistic budget, and it is usually based on historical financial data or external market research.
• Expenses : These are the costs that a company incurs to operate and generate income. Expenses can be classified into fixed costs, which remain constant regardless of the level of production, and variable costs, which change in proportion to the volume of goods and services produced. Common examples of expenses include salaries, rent, utilities, and raw materials.
• Profit : The profit represents the difference between the revenue and total expenses. A positive value indicates that the business is generating income, while a negative value points toward a loss. Monitoring profit levels over time can provide insights into a company’s operational efficiency and financial health.
• Cash Flow : Cash flow refers to the inflow and outflow of money within a business. It is a crucial component of a budget, as it helps to determine the company’s liquidity position and ensure that funds are available to cover expenses, investments, or unexpected costs. A positive cash flow is essential for the growth and stability of the business.

When creating a business budget, it is vital to analyze each of the components mentioned above and make appropriate adjustments to align them with the company’s financial goals. A thorough understanding of business budgeting can ensure that the management team is well-prepared to navigate the ever-changing business landscape and guide the organization towards a successful and prosperous future.

Setting Up Your Business Budget

Choosing the right business budget template.

Selecting the appropriate business budget template is crucial for organizing your financial plan. You can leverage various tools, such as Microsoft Excel and Google Sheets , which offer multiple pre-made templates. While selecting a small-business budget template, consider the following:

• Monthly vs. Yearly : Decide if a monthly or yearly budget would be more appropriate for your business. Monthly budgets are ideal for businesses that require frequent updates, while yearly budgets are suitable for a broader overview.
• Forecasting Capabilities : Ensure your chosen template allows you to forecast future financial scenarios, which can help you plan and adjust your strategies accordingly.
• Startup or Ongoing : Choose a budget template designed for a startup or an ongoing business, depending on your organization’s stage.

In addition to pre-made templates, you can also create customized budget spreadsheets in Excel or Google Sheets to meet your specific financial needs.

Structuring Your Budget Plan

Begin by structuring your budget with the following essential components:

• Income : List all sources of revenue, including sales, investments, and any other income streams.
• Fixed Expenses : Identify all recurring and necessary costs, such as rent, utilities, and insurance.
• Variable Expenses : These are costs that may change monthly, such as supplies, travel, and advertising.
• Discretionary Expenses : Indicate any non-essential costs that can be adjusted, like team-building events or extra software subscriptions.

An example of a budget breakdown in table format can be as follows:

By diligently setting up your business budget and selecting the right tools and templates, you can better monitor and control your organization’s spending. This enables you to make informed financial decisions that will contribute to your company’s growth and success.

Operating Budget Essentials

An operating budget is an essential tool for businesses as it provides a detailed forecast of the revenues and expenses expected to be incurred during a specific operational period, typically a year. It helps in planning and controlling the day-to-day operations of a business.

Calculating Fixed and Variable Costs

Fixed costs are expenses that remain constant, regardless of the level of production or sales. These costs are essential for maintaining the infrastructure of a business and generally include expenses such as:

• Software licenses

To calculate fixed costs, simply add up all the regular, non-changing expenses required to run the business during the specified period.

Variable costs , on the other hand, change in direct proportion to the level of production or sales. These costs include:

• Raw materials
• Labor costs
• Sales commissions

Variable costs can be calculated by identifying the cost per unit produced or sold and multiplying it by the total number of units. For better budgeting, it’s important to differentiate between the fixed and variable costs as it helps in understanding the company’s break-even point and profit margins.

Revenue Estimation and Sales Projection

Revenue estimation and sales projection are critical components of an operating budget. Accurate revenue forecasting enables businesses to make informed decisions on resource allocation and helps identify growth opportunities.

The following steps can help in estimating the revenue and projecting sales figures:

• Analyze historical sales data : Reviewing past sales data can help in identifying patterns, trends, and seasonality in your business, which will be useful in generating accurate projections.
• Evaluate the market : Analyzing the market size, demand, and competition will give you a better understanding of potential revenue streams.
• Set sales targets : Set both short-term and long-term sales targets based on the information gathered from steps 1 and 2.
• Calculate the total projected revenue : Multiply the projected sales volume by the average price per unit to arrive at your total revenue estimate.

Keep in mind that revenue estimation and sales projection should be regularly updated and adjusted based on sales performance, market conditions, and other relevant factors. An effective operating budget serves as a roadmap for the company’s financial success and allows business owners to make informed decisions for the future.

Managing Cash Flow

Monitoring income and expenditures.

Managing cash flow effectively involves keeping a watchful eye on both income and expenses. Businesses should regularly track their accounts receivable and strive to reduce the time it takes customers to pay. Timely invoicing and offering incentives for early payments can help expedite cash inflow. Regularly reviewing one’s income sources and ensuring they are reliable and sufficient is also crucial. Additionally, expanding income streams can further strengthen cash flow.

On the other hand, monitoring expenses is equally important. A good practice is to categorize expenses, separating fixed costs from variable ones. Addressing and cutting down on unnecessary or excessive spending can prevent cash from being tied up in unproductive areas. Some aspects to consider are:

• Inventory management : Optimizing inventory levels can help free up cash that would otherwise be tied up in excess stock.
• Negotiating better payment terms with suppliers to match when cash inflow is expected.
• Explore options to reduce overhead costs.

Improving Positive Cash Flow

To maintain a healthy cash flow, it is essential to consistently work on improving positive cash flow. Some strategies to adopt include:

• Create a cash flow forecast : A cash flow forecast should provide a clear projection of actual numbers for expected cash inflows and outflows for a specific period. This will give the business a better understanding of its financial performance.
• Invest in technology : Implementing financial software and tools can simplify cash flow tracking, resulting in more accurate data and efficient management.
• Encourage faster payments : Offer discounts for early payments, require upfront deposits, or accept multiple payment methods to speed up the cash collection process.

To sum it up, implementing these cash flow management strategies can help businesses effectively monitor their income and expenditures, thereby ensuring a stable and positive cash flow. This, in turn, assists businesses in making informed decisions for a successful financial future.

Financial Planning and Analysis

Financial planning and analysis (FP&A) is a critical component of a successful business strategy. It involves a comprehensive examination of financial data to guide decision-making and ensure the company remains profitable. By analyzing operating budgets, costs, expenses, and income, businesses can gain valuable insights that drive performance and help achieve strategic goals.

Profit Analysis and Optimization

One important aspect of FP&A is profit analysis and optimization. This process involves evaluating the company’s income sources, ensuring that they are generating sufficient revenue to cover costs and expenses. By carefully analyzing the financial data, businesses can identify areas for improvement and take informed decisions to boost their bottom line.

Some key components in profit analysis include:

• Revenue Sources: Identify and monitor the various income streams of the company.
• Profit Margins: Assess the profitability of each product or service offering, allowing for adjustments where necessary.
• Performance Metrics: Use metrics such as return on investment (ROI) or return on equity (ROE) to gauge the effectiveness of existing strategies and investments.

Expense Management and Cost Reduction

Another crucial aspect of FP&A is expense management and cost reduction. This approach focuses on identifying areas where the company can cut costs without negatively impacting overall performance. Effective expense management involves:

• Operating Budgets: Develop realistic operating budgets to track and manage expenses throughout the fiscal year.
• Cost Analysis: Regularly review and analyze costs to identify areas where savings can be realized.
• Vendor Negotiations: Engage in negotiations with suppliers and service providers to secure better rates or more favorable terms.

A few strategies for cost reduction include:

• Reducing overhead expenses
• Implementing process improvements to increase efficiency
• Consolidating suppliers to leverage economies of scale

By focusing on financial planning and analysis, businesses can maintain profitability while actively managing their expenses. With a well-formulated FP&A strategy, companies are better equipped to make informed decisions that lead to long-term success.

Budgeting for Small Businesses

Adapting the budget for small business needs.

For small businesses, creating a budget is essential for managing finances and ensuring long-term success. The main components of a small business budget include revenues, fixed costs, variable expenses, and profit. Start by estimating revenues, taking into account factors such as sales volume, price per unit, and external market factors.

Next, list all fixed costs, such as rent, insurance, and utilities. Fixed costs are expenses that do not change with fluctuations in sales or production volume. Identify and record all variable expenses, including the cost of goods sold, salaries, wages, and benefits. Variable expenses typically change in relation to sales volume or production output.

As a small business owner, it is important to monitor your budget closely and be prepared to make adjustments when necessary. For example, if sales decrease or expenses increase, you may need to revise your budget to ensure that your company remains profitable.

Small Business Budgeting Tools

To help manage your small business budget, there are a variety of tools and resources available. Some popular accounting software options include QuickBooks and Capterra, which provide features tailored specifically for small businesses. These tools can help streamline the budgeting process by automating tasks such as tracking income and expenses, generating reports, and managing cash flow.

In addition to accounting software, numerous websites offer free small-business budget templates. These templates are typically available in spreadsheet format and can be customized to fit your company’s specific needs. By using a template, you can easily input your financial data and quickly create a visual representation of your budget.

When choosing budgeting tools for your small business, it’s essential to consider factors such as ease of use, cost, and the level of support offered by the software provider. By investing in quality resources, you can efficiently manage your small business budget and set yourself up for financial success.

Budget Review and Adjustment

Analyzing budget variances.

Budgeting involves setting financial goals and expectations for a given period, such as a quarter or a year. It’s crucial to review your business budget periodically to evaluate its performance and make necessary adjustments. One way to measure your budget’s effectiveness is by analyzing budget variances.

Budget variances occur when there’s a difference between the projected income or expenses and the actual earnings or spending. To analyze these variances, start by comparing your budgeted revenue and expenses against the actual figures for the same period.

Identify significant variances in these categories by calculating the relative difference between budgeted and actual figures in percentage terms.

• Calculate the percentage variance for each category: (Actual – Budgeted) / Budgeted * 100
• Determine if these variances are favorable (positive) or unfavorable (negative).

Understanding the causes of significant variances can help you make more informed decisions about budget adjustments. If unfavorable variances are due to external factors or changing market conditions, it may be time to revise your business strategy.

Adapting to Financial Changes

Periodic budget reviews allow businesses to adapt to financial changes and stay on track with their strategic goals. If your analysis reveals any major discrepancies between your budget projections and actual performance, consider making the following adjustments:

• Revisit budget objectives : Ensure your budget objectives align with your current financial situation and business strategy.
• Prioritize adjustments : Focus on the most significant variances or those that impact your business’s financial health and strategic goals.
• Explore revenue opportunities : Determine if there are additional ways to increase earnings and reduce unfavorable variances, such as introducing new products or services.
• Review expenses : Identify any unnecessary spending or opportunities for cost savings to address unfavorable variances in costs.
• Stay flexible and proactive : Be prepared to adjust your budget as needed, considering changes in market conditions, customer demand, or unexpected exceptions to pursue new opportunities.

Through consistent budget review and adjustment, businesses can maintain optimal performance, remain responsive to changing conditions, and achieve their financial goals.

Advanced Budgeting Strategies

Forecasting future financial trends.

A crucial aspect of advanced budgeting is the ability to forecast future financial trends. By analyzing historical data and keeping an eye on current market conditions, businesses can make informed decisions on how to allocate resources effectively. One useful tool for forecasting is the startup budget template that helps visualize financial goals, expenses, and projections.

It’s essential to consider various factors such as economic climate, industry trends, and advancements in technology. Regularly updating the forecast with the latest information keeps the business prepared for market shifts and allows for strategic adjustments.

To forecast effectively, businesses should:

• Develop a strong understanding of the market and industry
• Utilize historical financial data to identify patterns and trends
• Factor in potential external changes, such as economic or regulatory shifts
• Regularly update and adjust the forecast based on new information

Budgeting for Growth and Expansion

When planning for growth and expansion, businesses must carefully allocate capital and resources to ensure success. Investing in new technology and human resources is vital, but it’s also crucial to plan for unexpected costs and challenges.

• Set realistic financial goals: A well-defined and achievable financial objectives are crucial for guiding the budgeting process.
• Invest in technology: Technology investments not only improve operations but also help businesses stay competitive in the market. Regularly evaluate the potential benefits and returns on technology investments.
• Allocate resources for human capital: Growth requires skilled personnel to execute strategies and manage operations effectively. Ensure the budget accommodates the recruitment and training of new employees.
• Consider external investment: Sometimes, additional funds may be needed for expansion. Evaluate opportunities for external investment, such as loans, grants or venture capital.
• Prepare for unexpected costs: Growth and expansion come with potential risks and unforeseen expenses. Business owners should plan and allocate funds to handle such situations.

By forecasting future financial trends and budgeting for growth, business owners can position their organizations for long-term success and resilience in a competitive market landscape.

Frequently Asked Questions

What are the essential components of a business budget.

A business budget typically consists of three main components: income, expenses, and the difference between the two, called the net income or profit. Income includes sales revenue and any other sources of income, such as interest or investments. Expenses are divided into fixed expenses, which occur regularly, and variable expenses, which fluctuate depending on the company’s activities. The net income represents the remaining profit or loss after deducting expenses from income.

How do you create an effective business budget plan?

To create an effective business budget plan, follow these steps:

• Analyze past financial data to understand the company’s historical performance.
• Set realistic financial goals and objectives for the future.
• Estimate future income based on sales forecasts and other revenue sources.
• Estimate future expenses, including fixed and variable costs, as well as any potential investments.
• Calculate the net income by subtracting anticipated expenses from projected income.
• Monitor and update the budget regularly to adapt to changes in the business environment and evaluate its effectiveness.

What budgeting methods are best suited for small to medium-sized enterprises?

The most commonly used budgeting methods for small to medium-sized enterprises (SMEs) are:

• Incremental budgeting: Builds upon the previous year’s budget, making adjustments for estimated changes in income and expenses.
• Zero-based budgeting: Requires justifying the need for every expense from scratch in each budgeting cycle, prioritizing allocation of funds based on importance.
• Cash flow budgeting: Focuses on forecasting cash inflows and outflows, ensuring that the business has sufficient funds to cover expenses and operational needs.

Each method has its own advantages and drawbacks, and the selection depends on the company’s size, industry, and management style.

How should one allocate funds within a business budget?

The allocation of funds within a business budget should be based on strategic priorities, which may include increasing sales, expanding the customer base, or improving operational efficiency. Funds should be allocated to essential expenses, such as rent, utilities, employee salaries, and crucial resources needed to maintain or grow the business. Additionally, the budget should include allocations for variable expenses and planned investments. Lastly, it’s essential to maintain a financial cushion to handle unexpected situations or emergencies.

Can you explain how to calculate and adjust a business budget over time?

Calculating a business budget starts with estimating revenues and expenses for a specific period. First, project your income sources based on sales forecasts, recurring revenue, and any other relevant data. Second, estimate fixed and variable expenses, incorporating adjustments for planned changes or growth of the business. Subtracting your total expenses from total revenue will give you the projected net income.

Adjusting a business budget over time involves monitoring and comparing actual results with budgeted figures. Regular reviews will highlight any discrepancies between the budgeted plan and actual performance, allowing for corrective actions, reallocations, or changes to the budget to better align with the company’s goals.

What tools or templates can assist in the creation and management of a business budget?

Various tools and templates can assist in creating and managing a business budget. Spreadsheets, like Microsoft Excel or Google Sheets, are commonly used for budgeting due to their customizability and ease of use. Online accounting software and budgeting platforms, such as QuickBooks or Xero, offer more advanced features and integrations with other financial tools. Additionally, numerous free and paid templates are available online, catering to different industries and business sizes. These templates usually include categories and formulas to simplify the budget creation process, allowing users to focus on forecasting and decision-making.

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Budgeting and business planning

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Planning for business success

The benefits, what to include in your annual plan, a typical business planning cycle, budgets and business planning, benefits of a business budget, creating a budget, key steps in drawing up a budget, what your budget should cover, what your budget will need to include, use your budget to measure performance, review your budget regularly.

When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.

Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan.

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

• a greater ability to make continuous improvements and anticipate problems
• sound financial information on which to base decisions
• improved clarity and focus
• a greater confidence in your decision-making

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

• an outline of changes that you want to make to your business
• potential changes to your market, customers and competition
• your objectives and goals for the year
• your key performance indicators
• any issues or problems
• any operational changes
• information about your management and people
• your financial performance and forecasts
• details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened.

• Review your current performance against last year/current year targets.
• Work out your opportunities and threats.
• Analyse your successes and failures during the previous year.
• Look at your key objectives for the coming year and change or re-establish your longer-term planning.
• Identify and refine the resource implications of your review and build a budget.
• Define the new financial year's profit-and-loss and balance-sheet targets.
• Conclude the plan.
• Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives.
• Go back to 1.

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to:

• control your finances
• ensure you can continue to fund your current commitments
• enable you to make confident financial decisions and meet your objectives
• ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve.

There are a number of benefits of drawing up a business budget, including being better able to:

• manage your money effectively
• allocate appropriate resources to projects
• monitor performance
• meet your objectives
• improve decision-making
• identify problems before they occur - such as the need to raise finance or cash flow difficulties
• plan for the future
• increase staff motivation

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

• cost of premises, including rent, municipal taxes and service charges
• staff costs –e.g. wages, benefits, Québec Parental Insurance Plan (QPIP) premiums, contributions to the Québec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT)
• utilities – e.g. heating, lighting, telephone
• printing, postage and stationery
• vehicle expenses
• equipment costs
• advertising and promotion
• travel and subsistence expenses
• legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales?

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts.

Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Projected cash flow  -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.

Costs  - typically, your business will have three kinds of costs:

• fixed costs - items such as rent, salaries and financing costs
• variable costs - including raw materials and overtime
• one-off capital costs - purchases of computer equipment or premises, for example

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues  - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.

If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

• an indicator of the costs and revenues linked to each of your activities
• a way of providing information and supporting management decisions throughout the year
• a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

• working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

Your actual income  - each month compare your actual income with your sales budget, by:

• analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products
• considering the reasons for a particularly high turnover - for example whether your targets were too low
• comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure  - regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability. You should:

• look at how your fixed costs differed from your budget
• check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure, for example by checking suppliers' payment terms

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Maximizing Profits: Conducting a Business Budget Evaluation

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At the end of the day, the goal of any business is to make a profit. It’s the north star of all decision-making with which a business is based. But like many lost and weary travelers, finding the promised land on horseback is easier said than done. 

So what does conducting a business budget evaluation have to do with maximizing profits? Read on to learn everything you need to know about reviewing and analyzing your company’s financial plan. 

What Is a Business Budget Evaluation?

A business budget evaluation is an organized method in which a company carefully examines its financial blueprint to assess how well it’s working, and if it fits the company’s needs. Through this evaluation, the company can make sure that its financial actions are in line with its overall objectives. 

This budget process also helps in predicting potential financial gaps or surpluses — offering valuable information that aids in making strategic choices for the business.

Why Should a Business Evaluate Its Budget?

Evaluating a budget is not merely a routine financial exercise; it plays a crucial role in the growth and sustainability of a business. Here are three key reasons why a business should evaluate its budget:

1. Assess Business Financial Health

Assessing the financial health of a business involves a thorough examination of its budget. This analysis delves into the company’s overall financial status by scrutinizing income sources and expenditures, and juxtaposing projected and actual numbers. This comprehensive perspective empowers executives to gauge the effectiveness of their financial approaches. 

Through budget analysis, they can pinpoint advantages, drawbacks, and areas with potential for enhancement. This establishes a robust base for both financial stability and expansion.

2. Determine Where to Allocate Resources

By conducting an assessment of the business budget, the company can identify sectors where increased investment or resources are required — as well as those that might be receiving excessive funds. Thoroughly analyzing financial data empowers managers to make well-informed choices regarding resource distribution. 

This focused allotment guarantees that critical areas obtain the necessary backing, thereby promoting effective fund utilization and alignment with the business’s strategic objectives.

3. Identify Potential Cost-Saving Opportunities

A detailed review of a business budget can reveal opportunities to reduce costs without sacrificing quality or performance. By analyzing spending patterns, comparing suppliers, and evaluating the return on investment of various initiatives, a company can identify areas where costs can be reduced. 

This promotes financial efficiency, frees up funds for other important activities, and can directly improve the bottom line. 

How to Conduct a Business Budget Evaluation?

Before initiating a business budget assessment, it’s essential to establish a meticulously crafted plan. These six steps ensure a comprehensive review of your company’s financial health — positioning yourself to make educated decisions about upcoming financial strategies.

1. Review the Budget for the Current Period 

Start by collecting all essential financial documents, such as income statements, balance sheets, and cash flow statements. These materials offer a snapshot of the company’s financial performance, forming the baseline for the evaluation. This includes reviewing projected revenues and expenditures for the period and any discrepancies between budgeted and actual amounts.

2. Compare Actual Financial Results to the Budget

Next, analyze the differences between the budgeted figures and the actual numbers for revenue, expenses, and overall profitability. Identifying these variances allows you to understand where and why the financial performance might have deviated from the original plan — helping to uncover insights for future budgeting.

3. Analyze the Reasons Behind Any Significant Variances 

Thereafter, investigate the underlying causes that may have led to any significant discrepancies, such as unexpected shifts in market conditions or surges in operating costs. Look for patterns or trends that might have contributed to these variances. 

Additionally, determine whether these differences have positively or negatively influenced key metrics such as profitability and cash flow, allowing for a more nuanced understanding of your financial position.

4. Adjust Your Budget as Needed

Once you’ve analyzed any variance, evaluate whether modifications are required to the existing budget based on the insights gained from the analysis. This could entail updating revenue forecasts, fine-tuning expense distributions, or reallocating resources to different areas.

5. Develop a Plan to Address Any Financial Challenges or Opportunities 

Based on the findings from the evaluation, devise a plan to tackle any financial obstacles or capitalize on opportunities that may have arisen. This could include implementing measures to reduce costs, investigating new sources of revenue, or pursuing additional financing options. 

6. Monitor and Track Progress Towards Budget Goals

Finally, it’s vital to closely watch the financial performance of your business to confirm that it remains aligned with budget goals. Regularly reviewing financial reports to promptly adjust the budget keeps the company on track and responsive to changing financial conditions. This constant vigilance helps maintain financial control and promotes sustained progress toward desired financial goals.

Tips for a Successful Business Budget Evaluation

Executing a business budget evaluation is a comprehensive task that requires attention, precision, and foresight. The steps outlined above provide a robust framework, but the success of the evaluation often lies in the details. To make the most of this process and foster a successful evaluation, here are some additional tips that can be employed:

1. Collaborate with Your Team

Collaborating with your team can guarantee a successful business budget evaluation by pooling diverse insights and expertise. Much like the old saying “two heads are better than one,” involving team members ensures a multifaceted analysis. Different perspectives can unearth hidden challenges and opportunities, leading to a balanced and comprehensive budgeting process.

2. Be Adaptable and Flexible

Financial landscapes can change rapidly, and sticking to a rigid plan can hinder efficiency. But by being open to adjustments and embracing unexpected shifts, you can proactively address evolving challenges and opportunities. This adaptability ensures that the evaluation remains relevant and effective, aligning with both current realities and future potential.

3. Leverage Software Tools

Leveraging software tools can play a significant role in a successful business budget evaluation. Modern financial software can automate data collection, offer real-time insights, and provide advanced analytical capabilities. These tools can also streamline the evaluation process, minimize human error, and enable refined metrics.

Taking Control of Your Finances for Optimal Returns

Taking control of your business finances is no easy task. It requires careful auditing, attention to detail, and precise legal compliance. That’s a lot of pressure for one person or small team to handle when a business is growing. 

At doola, we make handling your bookkeeping duties a breeze. With cutting-edge software that simplifies your financial management, doola offers that extra hand when your inbox is through the roof. Get started in under 10 minutes today!

How often should business budget evaluation be conducted?  

Business budget evaluations should be conducted regularly, such as quarterly or annually, depending on the size and nature of the business. 

How can business budget evaluation help improve decision-making?  

Business budget evaluation provides insights into financial performance, uncovering areas for improvement or investment. These insights guide leaders in making informed, strategic decisions that align with the company’s objectives and financial health.

What are some common challenges in business budget evaluation?  

Common challenges in business budget evaluation may include inaccurate data, lack of collaboration among team members, insufficient understanding of market fluctuations, and difficulty in adapting to unforeseen changes in the business environment.

What are some key metrics to consider during a business budget evaluation?  

Key metrics to consider during a business budget evaluation may include revenue, expenses, profit margins, cash flow, debt ratios, and return on investment. 

How can businesses ensure the accuracy of their budget evaluation?  

Businesses can ensure the accuracy of their budget evaluation by using reliable data sources, leveraging specialized financial software, engaging in regular monitoring, and working with financial experts.

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Budgeting Process: Steps and Best Practices for Planning a Budget

• Written by Keith Murphy
• 18 min read

KEY TAKEAWAYS

• Budgeting is crucial to ensure your business has enough money to remain operational and earn profit.
• Using financial tools can help save time and resources while improving accuracy in the budgeting process.
• Whether you have a small business or a large corporation, the basic steps and best practices for managing budgets are the same.

Budgeting is a vital aspect of financial management that helps businesses allocate resources effectively, control costs, and achieve their financial goals.

In this article, we will discuss the typical steps involved in the budgeting process, the challenges of forecasting, best practices for effective business budgeting.

We will also look at how spend management software , like Planergy, can help keep track of expenses and control spending within budget limits.

Why is Business Budgeting Important?

Business budgeting plays a crucial role in the financial success of a company. Regardless of size, all companies must have an annual budget for every fiscal year.

Larger companies may have a budget committee in charge of creating multiple types of budgets , including operating budgets and departmental budgets .

The end goal should be a detailed budget that covers everything you expect to spend, plus some excess for discretionary spending.

Budgeting should be part of regular financial planning. As you make budget decisions, consider:

• Available funds
• Capital expenditures and operating expenses, including variable and fixed costs
• Plans for the next fiscal year

Use documents such as your:

• Income statement
• Cash flow statement
• Utility bills
• Payroll documents

These documents will help you develop your master budget. Use your business plan as a guide if it’s your first year in business. If you’ve been in business for a while, you can use information from the prior year to help you set up the budget.

This is the case unless you are using a zero based budgeting approach.

Sets Financial Goals and Objectives

A well-prepared budget serves as a roadmap for your business’s financial growth. By setting clear financial targets, you can align your business strategies with your desired outcomes, such as increased revenue, reduced expenses, or higher profitability.

Budgeting also helps you prioritize investments and allocate resources to achieve these objectives effectively.

Allocates Resources Efficiently

Business budgeting lets you analyze your company’s financial needs and distribute resources accordingly.

This ensures that each department or project receives adequate funding, vital for smooth operations and achieving your business goals.

Efficient resource allocation also helps you avoid overspending and maintain a healthy cash flow .

Identifies Potential Financial Problems Before They Arise

Regular budgeting lets you spot financial issues early on, such as declining sales, rising costs, or cash flow shortages.

By identifying these problems in advance, you can take proactive measures to address them, such as cutting unnecessary expenses, renegotiating contracts, or seeking additional funding.

This ensures that your business remains financially healthy and avoids costly issues down the line.

Modern Software Reduces Budgeting Time & Effort

Many businesses still rely on outdated, manual budgeting methods, such as spreadsheets or pen and paper.

This can be time-consuming and error-prone, leading to inaccuracies in financial forecasting. By using modern budgeting software, businesses can dramatically reduce the time and effort required to generate accurate budgets.

Accurate real-time tracking and reporting on budget vs actual expenditure can avoid overspends and gives visibility of underspends so budgets can be adjusted or reallocated as needed.

Business budgeting software automates many of the manual processes, allowing you to quickly develop comprehensive financial plans without sacrificing accuracy or detail.

This can provide peace of mind that your business’ finances are well-managed and help enable more informed decision making, and easier financial reporting.

Measures Business Performance Against Established Benchmarks

A budget is a benchmark against which you can compare your financial performance. This enables you to evaluate your company’s progress toward its financial goals and identify areas that need improvement.

Regularly reviewing your budget and adjusting it based on your business’s performance helps you stay on track and make informed decisions.

Helps Decision-Making and Long-Term Planning

Budgeting provides valuable insights into your business’s financial health and future prospects. These insights are essential for making strategic decisions, such as expanding into new markets, launching new products, or acquiring other businesses.

Additionally, a well-structured budget can help you plan for long-term growth by identifying opportunities for cost reduction, revenue generation, and investment.

No matter what your budget looks like, set aside some funds to account for unexpected expenses or overages.

Steps in the Budgeting Process

Budgeting is a crucial aspect of financial management that helps businesses plan and allocate resources effectively. It typically involves the following steps:

Setting Financial Objectives

Start by determining your short-term and long-term financial goals, such as increasing revenue, reducing costs, or improving profitability.

These objectives should be specific, measurable, achievable, relevant, and time-bound (SMART) to ensure they are realistic and attainable .

Gathering Historical Data

Review past financial statements, records, and reports to gain insights into your business’s financial performance and trends. This can include a budget analysis report and budget variance analysis .

This information will help you identify areas of strength and weakness and opportunities for improvement and growth.

Using spend management software, like Planergy, will allow you to gain real-time spend visibility and make better decisions.

Forecasting Revenues and Expenses

Based on historical data, market research, and industry trends, estimate future sales, costs, and other financial variables. Variable expenses can be difficult to budget for, so they need to be considered carefully .

Consider factors such as seasonality, economic conditions, and changes in your business operations when making these projections.

Preparing a Preliminary Budget

Create a draft budget that outlines your projected revenues, expenses, and cash flow.

This should include line items for each category of income and expenditure, as well as a summary of your overall financial position.

Reviewing and Adjusting

Analyze the preliminary budget to ensure it aligns with your financial objectives and accurately reflects your business’s anticipated financial performance.

Make any necessary adjustments, such as reallocating resources or revising revenue projections, to create a more accurate and realistic budget.

Implementation

Once your budget is finalized, communicate it to relevant stakeholders, such as department heads, employees, and investors.

Ensure that everyone understands the budget’s objectives and their role in achieving them. Integrate the budget into your business operations, using it as a guide for decision-making and resource allocation.

Monitor and Review

Regularly track your actual financial performance against the budget to identify any discrepancies or areas that require attention.

Review your budget periodically and adjust as needed to account for changes in your business environment or financial performance.

This ongoing monitoring and review process will help you stay on track and ensure that your budget remains an effective tool for managing your business’s finances.

Budget Forecasting Challenges

Economic uncertainty.

Unpredictable market conditions, such as consumer demand fluctuations, interest rate changes, or shifts in global economic trends, can impact your revenue projections and expense estimates.

Economic uncertainty makes it difficult to accurately predict your business’s financial performance, which can lead to over- or underestimating your budgetary needs.

To address this challenge, consider using multiple scenarios (optimistic, realistic, and pessimistic) in your budget forecasting process to account for potential variations in market conditions.

Inaccurate Historical Data

Your budget forecasts rely heavily on historical reporting data to project future revenues and expenses. Incomplete or incorrect historical data can lead to flawed forecasts, resulting in unrealistic budget expectations and poor decision-making.

To overcome this challenge, maintain accurate and up-to-date financial records, and review them regularly for errors or inconsistencies.

Use industry benchmarks and market research to supplement your historical data and provide a more comprehensive view of your business’s financial outlook.

Changes in Business Operations

Significant changes in your business operations, such as new product launches, acquisitions, or changes in your supply chain, can impact your budget projections.

These changes may introduce new revenue streams or alter your cost structure, making it challenging to forecast your business’s financial performance accurately. For example, a significant increase in operations can result in a decrease in cash flow .

To address this challenge, closely monitor any changes in your business operations and incorporate them into your budget forecasts.

This may involve updating your revenue projections, adjusting your expense estimates, or reallocating resources to accommodate the changes.

Benefits of Business Budgeting

Improved financial control.

Budgeting helps you monitor and manage your business’s finances more effectively. By setting financial targets and allocating resources accordingly, you can track your company’s performance and ensure it stays on track to achieve its goals.

A well-prepared budget also enables you to identify areas where cost savings can be made, or resources can be reallocated to maximize efficiency.

Enhanced Decision-Making

A well-prepared budget provides valuable insights for strategic planning and decision-making.

By analyzing your projected revenues and expenses, you can identify growth opportunities, prioritize investments, and make informed decisions about your business’s operations.

Budgets also serve as a reference point for evaluating the financial impact of various alternatives, helping you choose the most cost-effective and beneficial options for your company.

Better Risk Management

By identifying potential financial issues early on, budgeting allows you to mitigate business risks and implement contingency plans.

Regularly monitoring your budget helps you spot potential problems, such as cash flow shortages or declining revenues, before they become critical.

This proactive approach to risk management allows you to address issues in a timely manner and minimize their impact on your business’s financial health.

Increased Profitability

Effective budgeting helps optimize resource allocation and control costs , increasing profits.

By carefully planning your expenses and analyzing your procurement spend you can identify areas where cost savings can be achieved, you can reduce unnecessary spending and improve your company’s bottom line.

A well-structured budget can help you identify new revenue opportunities and invest in initiatives to drive growth and profitability.

Best Practices for Business Budgeting

To ensure effective business budgeting you should consider following these best practices:

Involve Relevant Stakeholders

Include employees from different departments to gather diverse perspectives and insights.

Involving key stakeholders in the budgeting process ensures a more comprehensive understanding of the company’s financial needs and promotes buy-in and commitment to achieving budget goals.

Use Current, Accurate Data

Base your revenue and expense projections on accurate, up-to-date information. If the information is not accurate or not up to date you can be sure your budget will have the same problem.

Be Realistic with Expectations

Avoid overly optimistic or pessimistic assumptions that could lead to unrealistic expectations and poor decision-making. Use historical data and industry benchmarks to create a more reliable and achievable budget.

Adjust for Seasonality

Consider seasonal fluctuations in sales and expenses when creating your budget. Many businesses experience variations in demand and costs throughout the year due to factors like holidays, weather, and consumer behavior.

Incorporating these fluctuations into your budget can help you better plan for and manage resources during peak and off-peak periods.

Use a Rolling Forecast

Update your budget regularly to account for market conditions and business operations changes. A rolling forecast is an approach where you continually update your projections for a set period (e.g., 12 months) as new data becomes available.

This enables you to maintain a more accurate and up-to-date financial outlook, allowing for quicker strategy and resource allocation adjustments as needed.

How Can Software Help You Manage Your Budget?

Spend management software like Planergy can help you manage your budget by:

Streamlining Data Collection

Spend management software like Planergy can help you manage your budget by automatically importing financial data from various sources.

This saves time and reduces errors by eliminating manual data entry and ensuring your budget is based on accurate, up-to-date information.

Facilitating Better Collaboration

Enable team members to work together on business budget planning and review processes using spend management software.

This fosters better communication and collaboration among stakeholders, allowing for a more comprehensive understanding of the company’s financial needs and promoting commitment to achieving budget goals.

Providing Real-Time Insights

Generate reports and dashboards with spend management software that allows you to monitor your financial performance in real-time.

This enables you to quickly identify trends, discrepancies, and areas of concern, allowing for more informed decision-making and timely adjustments to your budget and strategy.

Improving Expense Tracking

Track expenses against your budget with ease using spend management software, and identify areas where spending can be controlled.

This helps ensure your business stays within budget, allowing for more effective resource allocation and improved financial performance.

Simplify Business Budgeting with Planergy

Effective business budgeting is crucial for managing your company’s finances, making informed decisions, and achieving financial goals.

By following best practices and leveraging spend management software like Planergy, you can create an accurate and comprehensive budget that supports your business’s long-term success.

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Updated: Oct 23rd, 2023 • 6 min read

A New Leader’s Guide to Efficient Budget Management

Effective and efficient budget management is the cornerstone of a successful business operation. It is close to personal financial management but more complicated due to the size, structure, and short and long-term objectives. It requires planning, commitment, and discipline to plan. It consists of planning and implementation that provides the standard for the effective use of financial resources for business operations . This article will highlight the steps to creating realistic and effective budgets for new and existing departments, how to make sure that budgets are being followed, and how to cultivate a more effective budget management process.

First Step to Budget Management: Planning

Budget management starts with planning an operating budget. Planning is key to the budgeting process, drawn from the short and long-term objectives of the company. The plan must be aligned with the objectives, goals and visions of the business, as well as the overall business strategy. These should be your standards when planning the overall budget. By being focused on the strategic plan and objectives, your department will not be led astray by unnecessary expenditures on items or elements not in line with the business strategy and objective.

• If you are setting up a new department, planning a departmental budget is one of the initial steps of the set up. The plan must be in line with the objectives or goals you want to achieve within the department as well as within the organization as a whole. For example, you are setting up an IT department to facilitate the IT needs of other departments and centralize the gathering and distribution of information throughout the enterprise. Budgeting is putting in the financial resources needed to achieve the objective and goals of the set up and operation.
• For an already existing department, your job as a manager, is to ensure the existing budget meets the objective and goal of the department. Look into the existing or baseline budget if the financial resources allocated to your department are used effectively. Use this as an outline for your planning for your budget forecast. Look into the resource usage, if these are sufficient or deficient in the existing operations to meet the business needs.

Aside from this, here are key items in budget planning that you have to consider; estimated, fixed and variable cost in operations, as well as the cost of implementing a goal and emergency funds.

• Fixed costs are expenses that do not change, such as employees’ salaries, rentals and insurance. These do not change and need to be funded. If you are planning to increase the number of employees in the department, the cost of hiring and salary of the employees should already be estimated and included in the budget.
• Variable costs are the estimated expenses that vary from month to month, such as overtime pay and software subscriptions. These should be controlled and within the allotted budget. An example of this is quarterly or bi-annual checking and maintenance of hardware, which means overtime for IT personnel to cover more grounds at the least possible downtime for other departments.
• Cost of goal implementation is the estimated expenses related to executing the initiatives to meet a certain goal. Examples are upgrades in solutions or hardware to cope with the demands of the department in facilitating the needs of other departments.
• Emergency fund is a resource for the unforeseen expenditure that needs to be addressed right away.

Make Monthly Reviews for Efficient Budget Management

After the Budget planning and approval by the business owner(s) or board, the next step in the budgeting process is the implementation of the budget. When the budget is implemented, monthly reviews are executed to verify the actual expenditures are in conformity to estimated amounts, and take the necessary steps to decrease the variance between the estimated and actual costs. Monthly reviews on the budget plan against the actual expenditure gives you the opportunity to tweak and prevents incurring unnecessary expenses and mistakes that are detrimental to saving and achieving objectives while you are operating in the fiscal year. Reviewing the budget is a cost efficiency effort to increase savings by preventing nonessential items from creeping into expenditures.

Implement Cost Saving Process for Efficient Budget Management

In line with implementing a monthly review, analyze the different areas of operations in the department wherein you can save, as well as increase the efficiency of the business process. Here are some areas in which you can implement a cost-saving process to decrease expenditures and increase department efficiency:

• Study your supply expenditures and look for suppliers that can meet your price demand. Sometimes it’s a matter of looking for better vendors to meet your demands both in supply quality and price.
• Track the efficiency in operations and in achieving goals by setting up performance measurements. When you’re tracking and measuring the effectiveness of operation and goal achievement, you are proactively ensuring that your execution meets the strategic plan including the budget. It enables you to make the necessary adjustments within the period of operation. Cost efficiency equals savings.
• Look into subcontracting part of your business operations to meet more of the demands of the department. Subcontracting sections of business ops lowers costs while meeting the objectives for that period.

Efficient budget management requires planning, considering all key elements of operation, in line with strategic planning to meet objectives and goals and unforeseen events. Having an effective way to manage budgets goes a long way, and discipline plays a big role in the budgeting process and implementation to ensure the effectiveness and cost savings.

A Proactive Budget Management Process

There shouldn’t be any surprises when your team needs to execute on a project – everyone in your organization should have the ability to make smart financial decisions that benefit the company, and this starts with having visibility to budgets.

Having real-time data to what has been spent and what is left of the budget will allow department heads and employees the ability to cultivate better Spend Cultures in their organizations, as they will now be more aware of what projects are financially viable and think twice before making purchases on behalf of the company.

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8 Tips For How To Successfully Manage A Business Budget

Budgets sometimes get a bad rap. They can feel constraining. New managers may fear repercussions if they struggle to stay on budget. They may also worry that a lack of experience in finance sets them up for failure. Meanwhile, business owners may feel too overworked to make time for monthly reviews and end up literally paying for it later when spending veers off track. Crunching the numbers to prepare the next annual budget can turn into a dreaded chore.

Of course, none of these problems are the budget’s fault! Inaccurate or incomplete information, neglected budgets, and obsolete (and error-prone) systems are all indicators that it’s time to shake up your relationship with your business budget.

Fortunately, there’s a lot you can do to work more effectively with your budget. In this article, we’ll discuss ways to track expenses more promptly and keep your budget connected to your actual business operations. We’ll also discuss ways to share budget management responsibilities so one person isn’t taking on the full load.

Business Budget Management Process

All too often, when people imagine business budget management, they picture filling out an annual spreadsheet that’s meant to hold all the financial details for the business. Keeping budgets in the finance department and over-relying on spreadsheets can open you up to serious risk.

For one, your budget can’t reach its full effectiveness if it’s siloed in the finance department. Any decision-maker in your company should consult and update budgets to keep bookkeeping accurate. Businesses may need distinct budgets for specific departments or even individual projects. That means you need the flexibility and confidence to let managers take ownership of the budgets for their department.

About 63% of businesses are still using Excel as a primary budgeting tool, but successful budget management needs to go way beyond the spreadsheet. Spreadsheets, although helpful for some aspects of organization, are highly prone to error. As in, an estimated 90% of spreadsheets have errors . A missed minus sign or extra zero copy-pasted into a cell could translate to a multi-million-dollar mess. Not all businesses have the ability to recover from a serious budget mistake.

Instead, make your budget a fully-integrated, iterative tool that helps guide multiple aspects of your business, from high-level strategy to daily operations. Here’s how to build a more effective process.

The 4 Step Budget Management Process

Effective budget management combines several skills. Ideally, each step in the budgeting process helps improve your control and accuracy, helping you create even better budgets over time.

1. Preparation: Budgets guide spending and predict revenue for a particular period of time. You may have a short-term budget that covers no more than a year, a mid-term budget (2-3 year), or a long-term budget that forecasts your business finances for 4 years or more. Many businesses create multiple budgets. They may rely more heavily on a short-term budget to guide daily operations and a long-term budget for high-level planning, for example. Gather your best estimates of cash flow, revenue, and expenditures to allocate resources wisely.

2. Delegation: After putting in the work to build a budget, it would be a shame for it to sit in a file folder for months. Senior management should designate who will be responsible for maintaining and updating localized budgets. You’ll also need a management plan for these point people so all budget updates can come together into a cohesive whole.

3. Monitoring and collaboration: Regular monitoring is essential to maintaining a healthy budget. This is where you note over- or underspending, make corrective adjustments, and take note for future predictions. Collaborating with staff in specific departments can highlight any discrepancies between high-level expectations and actual daily needs. Ultimately, this step is your best chance to follow cash flow, monitor variable costs, and catch errors.

4. Forecasting: Planning business strategy starts with a clear picture of where you currently are and where you want to go. Accurate, up-to-date figures from your routine budget monitoring last year help you understand where you met or exceeded expectations, and where you hit unexpected difficulty. At the end of the year, your data can help inform your next annual budget to be more fitted to your actual operational needs.

>> Related: Strategic Business Spend Management for Growing Businesses <<

Who manages your budgets?

As we’ve discussed, budget management isn’t always limited to the accounting department. Here is a partial list of people who may need to be involved in some elements of the budgeting process:

• Senior executives
• Finance/accounting team
• Board of directors
• IT department lead
• Sales department lead
• Long-term project leads
• Travel managers
• Business travelers

When people rise to a management position, they don’t always come to the role with formal training on managing an operating budget. They may need guidance on correct bookkeeping procedure and how to weave budget monitoring in with other job responsibilities. For that reason, it can be helpful to develop training documents or protocols along with the actual budget. The goal is for any individual supervising part of the budget to understand how to track and update their sections properly.

8 Tips for Business Budget Management

Knowing why a budget matters and knowing how to implement successful business budget management in the midst of daily operations are two different things. Let’s look at a few suggestions to turn high-level understanding into actionable tasks you and your management team can do.

Set budget details appropriately

Budgets come in different forms. Designing a successful budget starts with understanding how detailed it’s worth making this particular version. You’ll most likely want to break budgets down at least to the department level. Often, though, it’s not especially helpful to get too deep into line items. Managers or even specific employees may be better equipped to know the granular details of frequent purchases. You also want room for managers to adjust budgets based on performance. A marketing manager may need flexibility to shift spending between social media platforms, for example.

Delegate effectively

In the early stages of opening a business, owners may clear most spending personally. As businesses grow, one milestone is reaching the point where the volume of decisions exceeds the owner’s capacity to handle solo.

Entrusting financial decisions to someone else is a big move! It can be difficult at first to let someone else have the power to spend the company’s money. Delegating will eliminate the bottleneck of forcing every purchase decision past the owner’s desk. Departments can respond to their needs more nimbly. Having budget management training tools available can help managers continue to improve their skills.

Collaborate

Departments need a certain amount of independent control over their own budgets. It’s equally important to encourage communication between related departments. The marketing team and the sales team have overlapping objectives, so working in conjunction can help each team operate more effectively. Finance may do well to work closely with IT to plan the best strategies to keep systems up-to-date without overspending. HR may need to connect with the travel management team to determine cost-effective recruiting strategies.

Standardize budget reporting

At this point, if you’re following steps in order, you have a budget that spreads over multiple departments. Each department spends some time managing its budget independently and some time collaborating with various other teams. The problem that may come to mind at this point is, “Who’s keeping track of all these different updates?”

It’s essential to keep a centralized “home” for budget management so executives can get a cohesive, high-level view when they need to. You can achieve this by working with a central system that all budget users can access. Even if individual departments handle their own budget monitoring, they should record expenses the same way. That way, you won’t stumble over how to combine all records into one master budget record.

Collect complete, accurate numbers

Monitoring actual business expenses is the lifeblood for your budget. Without this step, a budget is a purely theoretical document that can’t hold any real power to steer business decision-making. Collect thorough, accurate updates throughout each period to see how your intended budget performs in practice.

Two ways to do this are to set clear spend categories and make submitting expenses as convenient as possible.

When it comes to categories, context matters. The same restaurant meal can fall under a variety of categories depending on the purpose of the outing. An interview with someone you’re recruiting is an HR expense. A meal with a client is sales. A business traveler’s meal comes out of your travel budget. Set your system up to categorize these expenses appropriately so you have an accurate view of each type of expense.

You’re more likely to get complete information when submitting an expense report only takes a few minutes. Choosing a budget management tool with features like photo capture for receipts and automatic categorization can streamline the process.

Choose nimble accounting software

The more time managers have to spend chasing employees for expense reports, the higher the likelihood that expenses will start to fall through the cracks. Your choice of accounting software can make a big difference on how easy it is to record and share budget data.

Cloud-based technology is optimal to connect various departments or locations. It’s easier to invite someone from another department to hop over and view an expense that affects multiple teams. Everyone views the same up-to-date information, so you don’t get confused between versions of the same document.

Modern tech solutions often include automated processes that can reduce the risk of errors. Data entry on spreadsheets is highly susceptible to human error. Automation can save time for employees and produce more accurate reports.

Set budget update appointments

We’ve all been in situations where it seems like every project is due at the same time. During a crunch period, it can be tempting to drop every task that isn’t immediately relevant to handling an intense workload.

If you want to keep your business’ finances on track, though, you have to treat budget management as an essential task. It’s all too easy to keep pushing back a review until next week, “when things calm down.” The longer you leave a budget on the back burner, the greater the chances are that soon you’ll have a new fire to put out.

Decide how often you’ll close books and update department heads on any course corrections they need to take. A quarterly or monthly check can help catch overspending early enough to correct the issue.

Keep looking forward

The insights you gain from actual spend versus planned spend on one budget can inform how you prepare the next one. Make creating your next budget easier in the coming year by keeping notes from your reviews of financial statements.

Review notes can illuminate patterns you might not notice day to day. Did you have a surplus in some areas and feel stretched too thin in others? Are there patterns in spending that you could anticipate going forward, as well? Your own budget data is one of your best resources to build future plans and projections.

Additional Considerations for Successful Budget Management

Depending on your role within a company, your approach to budget management may vary. Whether you’re new to managing a budget for your team or an experienced business owner seeking to maximize the results of your efforts, you’ll find ideas for you.

For new managers

If you’ve recently moved up into a management position, handling finances for your department can be intimidating. Many managers come into their position with little or no official training in budget management — so if finance isn’t in your background, you’re not alone. Beat imposter syndrome and start off on the right foot with these tips:

Make friends in accounting: You may not be a finance expert, but chances are, you know some. Schedule a meeting with your company’s accounting manager to get up to speed. The accounting team may appreciate a chance to walk you through their preferred formatting, and you can get answers to your questions.

Track expenses yourself: Don’t depend on your supervisors to keep you appraised of your department’s financial performance. Block out time to prepare your own monthly reports. If you’re struggling to stay on budget, the news won’t catch you by surprise, and you may even have insights to make a case for why you need additional funds.

Fill in your knowledge gaps within your department. If you worked in marketing, maybe your role was Brand Strategist but you’re not sure how much typical spend is across your social media channels. Utilize your team to get insight into particular line items in the budget.

For department heads

As you get more comfortable leading your team, don’t neglect developing your budget management skills.

Seek out continuing education opportunities: A workshop, conference, or even a community college class can add formal instruction to the knowledge you’ve gained on the job. (This can also be a great tactic for new managers.)

Practice strategic thinking: Work with your team to come up with ideas to allocate funds more frugally. If you have a surplus, rather than blow it on last-minute purchases to secure next year’s budget, connect with your supervisor to discuss “back burner” projects you might have the resources to launch.

Keep asking for help: Just because you have more managerial experience under your belt doesn’t mean you won’t need help on occasion. Many finance professionals would much rather answer a basic question than fix an easily-avoided mistake later. Peers in other departments may also be good sounding boards for how to approach new tasks.

For small businesses

Small business owners stay busy managing multiple aspects of their company. Daily to-do lists can overshadow the importance of stepping back to plan for the long term. One critical task you face is bringing a sense of leadership and strategy to your budget planning, instead of just crunching numbers.

Start with priorities: Before you dive into the nuts and bolts of the budget, write out the overarching goals for the business. As a business owner, you’re responsible for tying the budget back to the entire company’s objectives. The first page of your budget should lay out the goals you intend to reach.

Include context: A high-level look demands broader perspective than a department lead would have to bring. Your budget needs a breakdown of your company’s stats (locations, number of staff, number of campaigns or products you’re preparing) and information about outside companies that affect you (e.g., vendor contracts). If a vendor were to increase their rates, you need a clear, quick way to assess whether to stay or pursue a new option. If you’re preparing to scale, having information about how costs break down by location and how much start-up costs were will be important.

Find expense management software that works for you: Even a business with minimal staff needs a streamlined way to enter expenses and submit budget updates. Small businesses may especially need these solutions because the owners need to fulfill so many roles, and because if you’re working with limited resources, you may suffer more from financial miscalculations.

Final Thoughts

Whether you’re in your first year of management or confidently leading your business, managing your resources wisely is essential to your success. Successful budget management requires a balance between decisive leadership and a collaborative spirit with other management within the business. A well-prepared budget that you use thoughtfully throughout the year can inform smarter decisions and lead to stronger performance.

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Strategies for Making Planning and Budgeting More Effective

With the fluctuating market, increased regulations, fickle consumers, and rapidly changing business models, managing business finances can present a lot of difficulties. 

Why Is Budgeting Such a Challenge for Finance Today?

The challenges with the budgeting process are both internal and external. According to Lee Feingold , Senior Associate at the Keystone Group, forecasting and budgeting has always been a challenge. It’s time-consuming and presents a lot of cross-functional struggles, since you need multiple areas of business collaborating on the same budget. However, today it’s more challenging than ever due to the number of external stakeholders involved as a result of the increasing complexity of business.

What Are the Key Trends CFOs See in Budgeting?

One of the biggest trends CFOs see in budgeting is zero-based budgeting , which has been increasing in popularity among financial analysts. Rodger Howell , Principal at PwC, says there are a lot of discrepancies regarding how to make the best use of zero-based budgeting, but doing it every few years to gain a fresh look at the business can be helpful. Integrated business planning is another key trend, and it helps to tie the long-term financial planning to the operating model, so businesses can bring the capital, operational, and functional planning together. Rolling forecasts are also rising in popularity, as they provide a more agile method of budgeting that can be modified as circumstances change.

How Can Financial Technology Help to Address and Improve Upon These Trends?

There has definitely been an increase in the number of businesses leveraging technology to improve their financial planning and forecasting. According to panelist Sherri Liao , Senior Director at The Hackett Group, the cloud has been a tremendous help in increasing user adoption of financial technologies. There are different types of budgeting software that can help to address cost and time to deploy, as well as tools to improve scenario modeling. The other beneficial aspect of financial technology is its ability to improve the data visualization, which promotes accurate analysis and gives businesses a clearer view of their finances.

Warning Signs That Your Budget Process Isn’t Working as It Should

There are a lot of warning signs that can help businesses identify when their budgeting process is no longer working. According to Howell, one of the key warning signs to identify is the time that the budget cycle is taking. If a business feels the process is taking longer than it should, then they’re probably right, and it may be time for a change. If it’s taking too long, it’s indicative that the process isn’t well-managed, and financial technology can streamline the process. Liao added that the tendency for an annual budget to be updated numerous times can often indicate that something in the planning and budgeting process isn’t working.

What Are the Identifying Factors of an Effective Planning and Budgeting Process?

While it’s important to identify red flags in a poorly functioning budget process, it’s equally important to take note when your budget process is effective. Liao says that target setting can be a key indicator. It can change the process of how budgets are carried out. By looking at the target setting to see how clear the objective is, it can help to manage the efficiency of the budget. Feingold says that it helps to take a top-down and bottom-up approach, where the CFO analyzes the numbers from previous years and conducts a top-down analysis based on major assumptions from the previous year. Then, the CFO should conduct a bottom-up analysis to see if there is a good alignment between the two.

How Does Data Quality Impact Planning and Budgeting?

Data quality plays a major role in successful planning and budgeting, and businesses need to ensure high data quality to gain the most accurate results. In Feingold’s opinion, redundant data can negatively impact budgeting and skew the results. Untimely data can also impact successful budgeting. By the time the budget is completed, some data may already be out of date. When data isn’t at the right level of detail, it can create issues as well, so maintaining quality data is essential.

How Can CFOs Increase Collaborative Budgeting Between the Finance Team and Business Leaders?

Collaboration between the finance team and business leaders is essential for successful planning and budgeting, but it can be a difficult process to achieve. Howell suggests that the CFO help to drive the corporate strategic planning process. Implementing a year-round ownership of budgets can be helpful, as it creates an organization-wide schedule to hold team members accountable.

Are Alternatives to Traditional Budgeting Helpful?

Traditional budgeting isn’t the only option for enterprises, and there are a lot of alternatives that can provide greater flexibility. Howell notes that many businesses use top-down high-level forecasting, as well as zero-based budgeting, which can help to gain a fresh perspective on the business budget. However, an interesting and helpful trend has been scenario planning , which can help businesses to understand the potential aftermath of a variety of business circumstances, so they can be more prepared for the future.

What Are Some Key Levers for CFOs to Employ to Improve the Planning and Budgeting Process?

CFOs need to be thinking of strategies to improve the planning and budgeting process. Feingold recommends that businesses keep the budget on their mind consistently throughout the year. This can be accomplished by putting together a weekly scorecard that every management meeting starts with. The scorecard will cover the key items impacting a budget to help everyone understand where the actual results are versus where the budget needs to be.

How to Increase Agility in Budgeting to Improve the Corporate Strategy

Agility is key to developing an effective corporate strategy. Feingold emphasizes that a weekly scorecard is essential to this aim, as it allows them to assess their goals and progress, so they can adjust more quickly when needed. Howell adds that simplifying data is essential. The data needs to be highly visual and easy to digest, so it can drive clear and evidence-based decision making.

Corporate budget planning a corporate budget is no easy task, but there are a variety of ways that businesses can improve the efficiency and accuracy of their budget. With the right software tools, businesses can gain more agility in their financial budgeting by utilizing complex scenario planning. They can also break away from the traditional budget and explore more effective budgeting approaches, like driver-based rolling forecasts.

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