People are budgeting more than ever—86% of Americans, to be exact. And they’re budgeting for a good reason. Eighty-five percent of people said budgeting helped them get out or stay out of debt. Whether you’re a budgeter in your personal life or not, one thing’s for certain: Budgeting for your business is a must.
Like a personal budget, your business budget maps out your spending and income during a period (e.g., year, quarter, etc.). You can work toward company goals like increasing profits and decreasing debt through a budget.
But first, you need to know how to create a business budget … which is exactly what we’ll cover below.
How to create a business budget in 8 steps
Creating a budget takes time. In fact, 20% of survey respondents said they don’t budget because it’s too time-consuming. But if you want to avoid overspending, you need to set aside time to budget.
Generally, you should create a budget that breaks down spending and income by month, quarter, and year.
Pro tip: Always put your budget in writing! The last thing you want to do is create a budget in your head and call it a day.
Learn how to create a business budget using the following eight steps.
1. Analyze historical data
Unless your business is brand new, you should have historical data to help craft your budget. How did your business do last year? Did you have a budget surplus, or did you overspend? Why?
Review your spending habits from the previous period. And, use income data to project for the future. That way, you can base your current budget on historical data.
Pull information from:
- Past budgets
- Income statements
- Balance sheets
- Cash flow statements
2. Choose the type of budget
There’s more than one budget to create—much more. When choosing between the types of business budgets, consider your business needs.
Budget types include:
- Operating budgets: A budget that details the funds your business needs to operate efficiently.
- Cash flow budgets: A budget that predicts the money coming in and going out of your business.
- Sales budgets: A budget that projects how much you’ll sell in a specific period, along with revenue and expenses.
- Labor budgets: A budget that helps you plan payroll costs by determining how many employees you need to hit a certain level of production. You can use payroll forecasting to create your budget.
- Capital budgets: A budget that helps you prepare to purchase large assets like machinery and property.
Generally, businesses use more than one type of budget. That way, you can budget your company’s spending and revenue along with department spending and revenue.
Break down expenses and income by department with Patriot’s easy-to-use accounting software.
3. Project your revenue
How much do you expect your business will bring in during the period? One of the first steps of creating a budget is to project your revenue.
To project revenue, you can:
- Analyze historical information (e.g., business records and ratios)
- Gather information about your target customers
- Analyze your competitors
- Research average revenues for your industry
Add up your income sources and estimate how much money your business brings in monthly. Remember to account for seasonality.
4. List out your expenses
How much does it cost to run your business? When it comes to knowing how to create a budget for a small business, you can’t forget your expenses—all expenses.
To get started, you can use historical data (e.g., accounting records) and research industry averages, vendor prices, and local utility costs.
Make a list of your business expenses. Because some costs fluctuate by month, consider breaking expenses into the following categories:
- Fixed expenses
- Variable expenses
- One-time expenses
Fixed expenses
Fixed expenses stay the same each month. Sales do not impact your fixed costs. Generally, predicting fixed expenses is easy since they do not fluctuate regularly.
Examples of fixed costs include:
- Rent
- Insurance
- Loan payments
Variable expenses
Variable costs fluctuate each month, based on your business’s sales. This type of expense increases when your sales increase and decrease as your sales decrease.
Examples of variable expenses include:
- Direct materials
- Direct labor
- Commissions
- Shipping expenses
One-time expenses
One-time expenses are costs your business has every so often. They are not repeating costs. For example, you may be planning on buying a new laptop, copy machine, or company car during the year.
5. Give yourself a cushion
In both life and business, things happen. Maybe a pipe in your brick-and-mortar bursts, requiring a $10,000 payout. Or, you spend $2,500 replacing your copier when it breaks down. Whatever the situation, expect the unexpected.
For accurate budgeting, give yourself a cushion for unexpected expenses. You can budget for a cash reserve, which is an emergency fund for your business. Consider setting aside money each month or quarter to put in your reserve.
6. Consult a professional
Knowing how to make a business budget is important. But that doesn’t mean you have to handle it on your own.
You might consider consulting a professional, like your accountant or small business lawyer, to help you create your budget. They have the experience and know-how to keep your budget realistic and help you make effective decisions.
7. Format your budget
Sure, a Post-it note or scrap piece of paper may work for your personal budget. But when creating your business budget, you need to format it.
Consider using a spreadsheet or template to finalize your budget. For example, you could create something like this basic budget example:
| January | February | March | |
|---|---|---|---|
| Revenue | |||
| Product sales | 50,000 | 50,000 | 20,000 |
| Services | 25,000 | 25,000 | 40,000 |
| Expenses – Fixed | |||
| Payroll | 5,000 | 5,000 | 5,000 |
| Rent | 2,000 | 2,000 | 2,000 |
| Expenses – Variable | |||
| Utilities | 500 | 500 | 350 |
| Advertising | 10,000 | 4,000 | 2,000 |
| Fuel | 400 | 400 | 400 |
Get as detailed as possible when formatting your budget.
8. Assess throughout the year
Knowing how to create a company budget requires one more thing: consistent assessment. More than likely, your business won’t 100% stick to your budget. And that’s OK! To keep up with changes, assess your budget—and business operations—throughout the year.
You may need to update your budget if:
- You need to hire more employees
- You need to let employees go
- Your suppliers raise their prices
- You decide to change suppliers
- Your products sell out
- You switch business locations
Make your budget a living document you continually edit and update throughout the year. That way, you can address situations as they arise—not the next year.
Budget mistakes
Even if you’re a budget-creating veteran, you still may fall victim to common budgeting mistakes. Here are five common budgeting mistakes and what to do to steer clear of making them.
1. Reusing last year’s budget
Typically, you create your budget for the upcoming year at the end of the previous year. If you had a budget last year, you likely use it as a basis for your upcoming budget.
But, you can’t simply reuse last year’s budget.
Your previous year’s budget was based on different circumstances—especially if your business was impacted by something like the coronavirus, a natural disaster, or an economic downturn.
In addition to external circumstances, you probably change things up in your business that increase or decrease your income or expenses. Don’t forget to account for these changes!
Not to mention, a key part of running a business is pushing your business to meet goals. As your business grows, so do its goals. So, if you constantly look back rather than forward, you could wind up holding your business back.
Stretch your business when you set budget goals. Of course, you don’t want to cut it too close. But if you reuse your previous budget, you may not take steps to cut expenses and increase business revenue.
Try this instead: Take a look at your previous year’s budget, but don’t copy it verbatim. Look at whether you were able to stay on budget. Extract important data from the budget, which brings us to our next mistake…
2. Failing to base your budget on data
There’s a happy balance between ignoring your previous budget and relying solely on it. For the best chances of creating an accurate budget, try basing it on data.
Estimating your expenses and income may leave you going way over budget. Why base your budget on guesswork when you have historical data you could be using?
Rounding and guessing could end up costing you thousands of dollars at the end of the year. Not to mention, you might have to deal with additional expenses from surprises and emergencies.
Try this instead: List out your projected sales, fixed expenses, and variable expenses. Using sales and payroll forecasting, determine whether you plan on having the same expenses. Think about any changes you plan on making that could impact your income (e.g., new products).
Categorize your expenses and income. Allocate how much you think you’ll spend on each expense and receive from each revenue source.
3. Not keeping track of money
Do you spend hours putting together your budget, only to leave it sitting on a shelf for the year? If you do, you probably have no idea how your actual performance compares to your budget.
Tracking incoming and outgoing funds is key to making business decisions. Failing to do it is also one of the biggest budget mistakes. If you put your business’s books on the back burner, you could wind up overspending and missing opportunities to cut back on unnecessary expenses.
Try this instead: Consider opting for a reliable accounting software to streamline the way you track incoming and outgoing funds. That way, you can easily compare your business’s monthly profits or losses to your budget and tweak it for the following month.
4. Cutting it too close
Being positive is a great thing in business. But if you are optimistic when it comes to budget planning, you could cut things too close.
Although you can predict fixed expenses, there are several variable expenses and things outside your control. Who could have predicted the coronavirus would sweep the nation and shutter businesses for months?
Try this instead: Leave yourself some wiggle room when budgeting. Keep an emergency fund handy in case you still need some extra money.
Pay attention to your monthly profits or losses. If you’re way off budget, you might be able to cut back on expenses or make efforts to ramp up sales the following month.
5. Forgetting to reinvest in your business
If you want your business to grow, you need to reinvest extra money into it. But when you’re under budget, it can be tempting to set that money aside.
Of course, paying down debts (e.g., business loans) and beefing up your emergency funds are important, too. But if your extra money goes to everything but your business, you could be missing out on key growth opportunities.
Try this instead: Look at any leftover funds you have at the end of each month (and year). Determine how much you can afford to reinvest into your business.
Looking for an easier way to track expenses and income, generate reports, and break down expenses and income by department? With Patriot’s online accounting software, you can do all this (and so much more!). Get your free trial today.
This article has been updated from its original publication date of December 15, 2022.
This is not intended as legal advice; for more information, please click here.
