How to create a small business budget
Budgeting is a crucial part of running a successful business. In this article, we explain what it is, why it’s important and how to do it.
6 min read
It’s no secret that budgeting is absolutely crucial to succeeding in business. After all, the most sophisticated marketing strategy and the highest-quality service mean nothing if you run out of money.
If you’re starting your own business in the UK, then, you’ll need to make sure you’re doing it right. Luckily, we’re here to help. In this article, we’ll go through what budgeting is and why it’s so important and walk you through the process of actually putting a budget together.
Investopedia describes a budget as follows:
‘A budget is an estimation of revenue and expenses over a specified future period of time.’
In the simplest terms, a budget is an overview of your business’s finances. Using past experience, market analysis and growth forecasts, you predict how much money you’ll have available, how much of it you’ll need to spend and what you’ll spend it on.
Crucially, a budget should provide both an overview of your business’s finances at present and projections for your finances in the future. Most businesses budget annually, but many also reassess throughout the year and adjust their operations accordingly.
Why is budgeting important?
Budgeting is important for looking both back and forward.
First, it helps you track and assess how you have performed over the last year.
Second, it is crucial to planning for the future. By identifying fixed and variable costs, likely revenue and overall income and expenses, you’ll be able to see how you can improve your business over the coming year.
Having a business budget in place can help you:
identify where to cut spending or increase revenue, by highlighting especially profitable or costly areas
develop realistic goals, by presenting a clear picture of your progress towards existing goals
encourage investors and lenders, by showing potential backers a professional analysis of your business’s future.
Unlike a forecast, which aims only to provide a realistic estimate of what your business might achieve over the next year, a budget is used as a roadmap to help you get your business to where you want it to be.
QuickBooks’ guide to budgeting in business
1. Tally your income sources
The first thing you should do when putting together a budget for your business is to figure out how much money your company is bringing in every month. Go back through your accounts and add up everything that comes in to produce a monthly total.
You should also check that you’ve noted all the different sources you receive income from. In addition to making sure you don’t miss anything off your total, this will help you paint a more detailed picture of your revenue.
Note: If you’re just getting your business set up, you won’t have any data from past income and expenses. That’s fine; for each of these sections, just use projections of what your costs and expenses are likely to be.
2. Determine your fixed costs
As you might have guessed, after you’ve worked out how much your business has coming in, you need to determine what you have going out: your costs. We’ll split them into two types: fixed and variable.
What are fixed costs in business?
Fixed costs are those that stay largely the same from one month to the next. Though they might change in the longer term, things like internet plans, website hosting and rent all count as fixed costs.
Determine your fixed costs by identifying the payments that stay the same across different months. Once you’ve found them, add them all together to get a total. This is the amount you can expect to be spending in fixed costs in any given month.
3. Include variable expenses
Don’t be thrown off by the change in terminology: costs are expenses, and most guides on budgeting for your business will use the two terms interchangeably.
What are variable costs in business?
If fixed costs are expenses that stay the same, variable costs are the opposite: costs that vary each month.
This isn’t always true, but higher variable costs will often result from higher levels of business activity in a given month. While raw materials will likely have a fixed cost per unit, for instance, you’ll need to buy more units if you’re producing more to meet higher demand.
For this reason, high variable expenses are not necessarily a bad thing. They also provide a lot of flexibility in your budget. If profits aren’t as high as you’d projected, you can reduce your variable costs to avoid falling into the red.
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4. Predict one-time spends
While both fixed and variable costs are regular expenses, there will also be things your business pays for that are rarer and harder to predict.
Examples might include:
replacements or repairs for old or broken equipment
finding, renting and decorating a new business space
administrative costs associated with restructuring
losses from discontinued operations
extraordinary costs associated with legal issues or natural disasters
Insurance can help protect against many of these costs, but you should still include them in your budget, both to be sure you’re getting value for money for your insurance and to avoid getting blindsided in the future.
5. Do the maths
Once you’ve got all your data in one place, you’ll need to do a little maths to make sense of it.
Let’s break it down into steps.
Add up all your income from all sources to get a total figure for this.
Add up all your costs, including fixed, variable and one-time expenses. This will give you your total expenses.
Subtract your total expenses from your total income to get your total net income.
When putting together an annual budget, it can help to divide these totals by 12 to get average monthly figures. This way, you’ll be able to check you’re on track at the end of each month, even if some of your bigger costs don’t start coming in until later in the year.
This can be especially important when starting a business, as you’re at greater risk of being caught out by increased variable costs and one-time spends. You can’t see the future, of course, but tracking your finances in this way will help put you in the best position possible to adjust and adapt to changing circumstances.
You’ve created a small business budget - what’s next?
Though it’s very important, the budgeting process is ultimately quite simple. And, thankfully, it gets easier the longer your business has been operating. Have no fear if you’re just starting out, though: our guide to starting your own business in the UK is here to help. Simply fill out the quick questionnaire to get an overview of your next steps towards business success.