Many people think of budgeting as their least favorite part of running a business—but if you want to be
successful, creating and maintaining a proper business budget will be a critical component of that success.
Here’s a step-by-step guide for how to create a business budget.
How to Create a Business Budget: Why Do It in the First Place?
Budgeting for your business is about making an educated guess as to how the future of your business’s
finances will look. It requires examining what happened last month, what happened three months ago, and what
this month last year looked like—then using that information to make wise financial decisions for the months
and years ahead.
If you’ve had a few bad months and predict you’re looking at another slow one, you can prepare to minimize
expenses where possible. If business has been booming and that video you posted went viral and is bringing
in customers, live a little riskier and invest in buying more inventory to satisfy those incoming customers
and keep them coming back.
In other words, you don’t need a crystal ball to run a business, but you do need to learn how to create a
business budget. And that does take some intuition and educated guesswork to make sure everything continues
to run smoothly.
Why You Need a Business Budget
When just launching your business, creating a budget is one of those things that can fall by the wayside.
If your business is operating with a significant amount of profit or is going through a boom, it might not
seem important to create a business budget.
But a budget can help to ensure long-term success for your business. A budget helps you to see past next
week and next month to next year, or the next five years, even.
More specifically, a business budget can help your business benefit by:
- Making it more efficient
- Pointing out funds leftover that you can reinvest.
- Predicting slow months and keeping you out of debt
- Estimating what it will take to become profitable
- Providing a window into the future
- Helping you keep control of the business
Creating a business budget will make operating your business easier and more efficient. A business budget
can also help to make sure that you’re spending money in the right places and at the right time to stay out
of debt.
How to Create a Business Budget: The Easy 6-Step Guide
This step-by-step guide on how to create a business budget of your own should help make the process as easy
as possible.
As you get started, you’ll notice that the business budgeting process starts with looking backward at your
past income and expenses. The longer you’ve been in business, the easier this process will be, as you’ll
have more data to look back on as you move to creating your forward-looking budget.
If your business is brand new, however, you might have to do some more extensive research into typical
costs within your industry or area in order to gather working estimates for your forecasted finances.
Whether you’re gathering information from within your own business or making estimated guesses based on
research, there will be some legwork involved in creating your first working budget. That said, you might be
surprised just how easy it is to create a business budget when you follow these steps.
Let’s break down each step.
Step 1: Examine Your Revenue
The first step in any budgeting exercise is to look backward at your existing business and find all of your
revenue (aka income) sources. Add all those income sources together to discover what money comes into your
business on a monthly basis.
When finding your income, make sure to calculate for revenue, not profit. Your revenue is all the money
that comes into the business before expenses are deducted. Profit is what remains after expenses are
deducted.
Once you’ve identified all of your income streams, calculate your monthly income. 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.
With 12 months (or more) of information, you can examine how your monthly income changes over time and look
for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the
hot summer months. Knowing about these seasonal changes will ensure that you can prepare in advance for the
leaner months, and give yourself a financial cushion.
Step 2: Subtract Fixed Costs
The second step in creating a business budget is to add up all of your fixed costs. The term fixed
costs applies to any cost that is necessary on a recurring basis for the operation of your business.
Fixed costs might occur daily, weekly, monthly, or even yearly, so make sure to get as much data as you can.
Examples of fixed costs within your business might include:
- Rent
- Supplies
- Debt repayment
- Payroll
- Depreciation of assets
- Taxes
- Insurances
Your small business is unique and will have different fixed costs than what’s described here. Take a few
minutes to make note of other fixed costs that might be associated for your business.
Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the
next step.
Step 3: Determine Variable Expenses
As you search for the data you need to list out your fixed costs, you might have also noticed there are some
variable expenses within your business as well.
Variable expenses are those that change depending on how much you use the service. Many of these are
necessary for your business to stay in operation, like utilities.
You’ll also find expenses in here that aren’t necessary for the function of your business, but would be
nice to have, like education, or extras that can increase profitability. Those are called “discretionary
expenses,” which you can roll into your variable expenses fund, too.
Some examples of variable expenses are:
- Owner’s salary
- Replacing old equipment
- Office supplies
- Professional development
- Marketing costs
- Utilities
During lean months, you’ll need to lower your business’s variable expenses, beginning with discretionary
spending. During profitable months when there’s extra income, however, you can increase your spending on
variable expenses for the long-term benefit of your business.
Step 4: Set Aside a Contingency Fund for Unexpected Costs
Whether or not you’ve run a business before, we all know that one-time costs don’t come when it’s
convenient. It’s the day before you host your entire family for Thanksgiving and the refrigerator goes out.
You’re on the way to the biggest presentation of your career and your car stalls.
These costs arise when you’re least expecting them, and usually when the budget is tight. Prevent fear of
unexpected costs when budgeting for your business by making sure you have some extra cash on hand and plan
for contingencies within your budget.
Although you might be tempted to spend any surplus of income on variable expenses, put some aside into an
emergency fund instead. That way, you’ll be ready when equipment breaks down and needs replacing, or you
need to quickly replace inventory that is damaged by flooding. Of course, there’s always the option for a
small business loan—but more options are better than fewer.
We hope for every business owner that the maxim holds true: If you budget for a problem, the emergency
never arises. And if the emergency does show up? Well, you’ve budgeted for it. It’s not really an emergency
then, is it?
Step 5: Create Your Profit & Loss Statement
Once you’ve collected all of the above information, it’s time to put it all together to create your profit
and loss statement, or P&L.
Just talking about a P&L can bring up feelings of anxiety—we get it. But remember, you’ve already done
all the work. And it’s addition and subtraction: Add up all of your income for the month and add up all of
your expenses for the month. Then, subtract the expenses from the income and hope you get a positive number
at the end.
If you do, you’ve made a profit! If not, that’s a loss—and that’s okay, too. Small businesses aren’t profitable
every month, let alone every year. This is especially true when you’re just starting out as a business.
Step 6: Outline Your Forward-Looking Business Budget
Whether you’re a new business or you’ve been doing this a while, projecting what will happen to your
business in the future is educated guesswork. If you’ve been in business for a while, that’ll certainly help
the accuracy of those guesses (as you might, well, guess).
Now that you’ve created your P&L—which is a historical document showing the past of your business—it’s
time to create your budget. And this is a forward-thinking, future-focused document.
For this step, referencing your P&L will help you better understand the seasonal ups and downs of your
business, which investments in your business are worth repeating, and what you should avoid in the
future.
On your P&L, look for these trends:
- Big supply or equipment purchases that create a beneficial loss
- Seasonal trends due to inclement weather, natural disasters, or economic turmoil
- Seasonal trends due to school calendars, tourist travel patterns, or supply limitations
- Profit that is higher than in previous years or can’t be explained
When examining your P&L, you’re looking for ways to explain the fluctuations and changes in your
business.
For example, if you operate a popsicle stand, you’ll see higher profit in the summer when the temperatures
are warm and kids are out of school. Knowing your most profitable months will help you to predict what your
next year will look like. You might also take that information and decide to hire more staff and extend your
hours during certain times of the year, making your business even more profitable in the months that demand
is highest.
How to Make a Business Budget: Making Budgeting Efficient
Most business owners didn’t get into the game to learn how to create a business budget, sure. So, how do
you make budgeting efficient so you can get back to the best parts of business ownership? Easy.
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Invest in accounting software to track income and expenses and automatically create your P&L
statements. From Xero, there’s a host of solutions for you to choose from.
- Nugent & Associates can help you manage your budget, course correct when the business gets off
track, and make sure you’re paying the necessary taxes.
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Break the process of how to create a business budget down into small steps—managing a business budget is
much easier when you do pieces of the work over time and tackle a little bit each day or every week.
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Put procedures in place for budgeting that’ll help you know where to find the numbers you need, when
expenses go out, and where the money you need is located.
- Try using one of our small business budget templates.
There are very few business owners you’ll meet who love budgets, finances, and spreadsheets. That’s simply
not why people get into business ownership. But budgeting is part of life when you own a business. So,
knowing step by step how to create a business budget and manage it efficiently will make your job as a
business owner just a little bit easier. Good luck!
