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An accurate small business budget is crucial to your company’s success and prosperity. Read on to learn about the steps you should follow to create a business budget you can stick to.
What is a business budget?
A business budget provides an overview of your business’s finances, helping you to estimate profit or loss and your business’s overall financial health. It brings together key financial data, such as income and expenses. This will allow you to assess where you may need to cut back or identify where you have opportunities for growth.
Every business should have an annual budget that you can break down for individual months or quarters. You can even budget for a specific event or season when you expect to earn or spend a lot of money. This means you can keep a closer eye on your business’s finances when necessary.
A good budget is based on a clear and up-to-date record of outgoing costs, including:
- Fixed expenses: wages, rent and loan payments
- Variable expenses: supplies and utilities, such as heating and water, where the cost may change each month
- Ad hoc expenses: one-off costs, such as purchasing new equipment or paying for repairs
Your business budget will also state your business’s anticipated income, typically from sales (whether of product or service), but potentially from other sources too, such as grants. For example, new businesses might be eligible for a start-up business grant.
If you don’t know where your money is coming from or what you’re spending it on, you’re unlikely to be able to plan for your business’s future. If you’re not confident about the health of your business’s finances, why would potential investors or lenders be?
Having a detailed business budget shows that you can control finances and plan for expenses such as loan repayments. This could make lenders and investors feel more confident about the future of your business.
When you know your business’s income and expected expenditure, you can work out how much of a profit or a loss you anticipate making, and plan accordingly.
So what does good budgeting look like – and how can you do it?
How to create a small business budget in 5 steps
Having a budget for your business enables you to see both your income and expenses at the same time. You can use this knowledge to prioritise spending or saving in specific areas of the business and to create new strategies for making a profit.
Creating – and maintaining – your budget can seem like an arduous process, but it doesn’t need to be difficult.
You can set up a budget for your small business in five steps:
- Predict your expenses.
- Estimate your income.
- Track your projected profit (or loss).
- Review your budget.
- Create an emergency fund.
Predict your expenses
The first step when creating your small business budget is to list your predicted expenses.
When budgeting, whether for the upcoming year or for a specific quarter, you will need to calculate:
- Fixed costs: monthly outgoings, such as rent payments, certain bills, staff wages, and loan repayments
- Variable costs: bills for supplies and utilities can go up or down each month
- One-off expenses: for example, replacing broken-down machinery or upgrading to new equipment
For example, let’s say you want to set up a business selling handmade jewellery online. If you’re planning to start out at home, you might find you don’t have many fixed costs. However, if you’re renting a workspace, you would need to budget for your fixed rent payments, and possibly variable energy costs too.
You might take out a business loan to finance your start-up costs. You would have to pay this back in instalments each month, so this is another fixed cost you would need to budget for.
You’ll also need to buy the materials you’ll use to make your jewellery. Precious metals, such as silver and gold, can fluctuate in price, making this a variable cost. It may be worth overestimating these costs so that you can still cover them if they do rise, and you’ll have some extra cash if they don’t.
Advertising your business on a social media platform, such as Instagram, Facebook or TikTok, can be free. That said, it can be difficult to reach users organically. As your business becomes more established, you might pay for one-off or ongoing marketing campaigns to boost your business’s visibility and hopefully bring in more income.
Even if paid marketing seems a while away, you can factor it into your business budget at the beginning to ensure you have enough money to fund it when it rolls around.
Any tools you need are likely to be one-off costs, though you may need money to purchase upgrades or to replace a broken tool.
In summary, our jewellery business has the following expenses:
- Fixed monthly costs: rent for a studio, start-up business loan repayments
- Variable costs: energy bills, buying silver and gold as raw materials, marketing campaigns
- One-off costs: upgrades to equipment, purchase of a replacement ring sizer
This is not a comprehensive list of business costs – this is representative and not an exhaustive selection. Your expenses will be specific to your business.
Estimate your income
As well as knowing how much your business will spend, you need to know the amount of money coming in. This way, you can work out if you can cover your expenses, or whether you need to curb your spending.
A simple way of predicting how much money the business may bring in is taking the number of sales and multiplying this by how much each sale is worth.
If your business has been trading for a while, you will be able to base your predicted number of sales on results from previous months, quarters or years.
However, if you’re starting out, it might be best to be conservative in your sales predictions while you make a name for yourself and establish your business. This means you will be less likely to overestimate your income and spend beyond your means.
That doesn’t mean you can’t aim to exceed your predictions – they aren’t limits, after all.
Let’s return to our previous example. Say your business makes three types of product: earrings, necklaces and bracelets.
Earrings sell for £10 a pair, while bracelets sell for £15 each. Necklaces are the most expensive item to buy, costing £25 each.
To work out how much income your business is generating, you should estimate how many of each item you will sell, and multiply this by how much each item sells for.
For example, if you think you will sell 45 necklaces, 100 pairs of earrings and 30 bracelets:
- Necklaces – 45 x £25 = £1,125
- Earrings – 100 x £10 = £1,000
- Bracelets – 30 x £15 = £450
Based on these sales, your total estimated income would be £2,575.
Track your projected profit (or loss)
When you’ve worked out your expected income and outgoings, you should be able to project whether you’ll make a profit or a loss at the end of the year.
Subtract your outgoings from the income you expect to make.
If you end up with a positive number, this indicates that you could be on track to make a profit. If you end up with a negative number, you’ll potentially make a loss – if you don’t make any changes.
Remember that your budget is only a performance prediction and actual profit could be different to the estimated figure. It is still better not to overspend if possible.
If it looks like you will make a loss, you may think about increasing your prices to try to cover any shortfall. You could also consider lowering your outgoing costs if possible. Explore switching your business energy or business insurance provider to try to save money on your bills. Cut back on costly expansion plans until you can afford them.
Let’s say our jewellery-making business has £2,000 in outgoings, including materials, start-up costs and loan repayments across the year.
To work out whether the business is expected to make a profit or a loss this year, let’s subtract the business’s expenses from its estimated income:
£2,575 (income) – £2,000 (outgoings/expenses) = £575 (profit)
Total anticipated profit: £575
Review your budget
You should review your business budget often to keep your small business’s finances in check.
Working out whether you are likely to make a profit or a loss helps you to plan your next steps.
If you’re consistently in profit, your business is doing well. You may want to think about how you could increase your profits, or even consider expanding.
If you’re making a loss, think about how to cut back on spending or how to attract more customers and more income.
Your business budget shouldn’t be a static document. Regularly review your budget to keep on top of your finances. Know where your money is coming from and see where you might be able to make savings or increase your profit.
Budget planning should also account for your long-term needs. If, for example, you find that you rely on seasonal revenue and 80% of your business’s funds come from the three summer months, you will want to account for this in your budget.
Knowing your cash flow and when money may come in, such as around events like Valentine’s Day or Christmas, is vital for budgeting.
Strategising for the distribution of your revenue across the financial year and reviewing your budget accordingly will help you maximise turnover.
You might anticipate a significant expenditure a few years down the line, such as for equipment maintenance or upgrades. Armed with this knowledge you can begin budgeting, and perhaps saving, for this in advance.
Create an emergency fund
Even with the best will in the world, creating a detailed budget will not make you immune to emergencies.
One way you can feel prepared to deal with the unexpected is by creating an emergency fund. Having some savings set aside to deal with a crisis without having to cut into your revenue unexpectedly can help take some of the stress away.
Say one of your jewellery-making tools breaks unexpectedly. Without an emergency fund, you might not immediately have the cash to replace it. This could slow down your business and have a negative impact on its finances.
Having a savings pot means you can buy a replacement immediately without worrying about financing the cost.
If you’re a sole trader, you may be able to use a personal savings account for your business finances if your bank allows this, as your personal finances are viewed as the same as your business finances.
If you run a limited company (or limited liability partnership), however, you will need to open a business savings account, as your business finances are legally separate from your personal finances.
You should keep this fund easily accessible in case of emergency. If you lock away your money in a ‘fixed-rate’ or ‘notice’ account, you may not be able to access funds straight away, so you should look for an easy-access business savings account.
Why do I need a small business budget?
Budgets allow you to identify ways to streamline spending and maximise profit, as well as helping you to plan accurately for the future. In short, effective budgeting can help your small business to thrive by allowing you to:
- evaluate your business strategy
- plan ahead
- grow your business
Evaluate your business strategy
You can use your budget to evaluate your business strategy, as it indicates what is going well and what could be improved.
This is why it’s important to be accurate and realistic when drawing up your budget. If you overestimate earnings and underestimate expenses, you may end the year with an unexpected loss.
Plan ahead
Having a clear business budget will allow you to know where your business is heading financially, which is crucial for future business decisions.
With a detailed budget, you can plan ahead, prioritise financially and implement changes that will improve the health of your outgoings and increase profit.
Forward planning enables you to identify cost-saving techniques and opportunities for growth.
That said, be sure to keep in mind outside factors, such as market evolution, new competitors and fluctuations in demand. These factors may influence your business’s finances, but having a budget should help you plan for their impact and mitigate it where possible.
Grow your business
If you want to apply for a business loan, including detailed budgets in your business plan can help prove to potential lenders that you can plan ahead. This could give them more confidence that you will be able to repay the loan on time and in full.
A solid history of reliable and detailed budgets can demonstrate to lenders and potential investors that you have the capacity not only to develop a business plan but to see it through to fruition. These parties will want to dig into your financial record, and clear evidence of strong budgeting practices could increase the likelihood of them working with you.
As businesses grow, they might implement different types of budgets. These include:
- Master budgets: An overall budget that combines all others.
- Operating budgets: Covers operating expenses, which are the ongoing costs of running the business.
- Cash-flow budgets: This tracks how money enters and leaves the company’s accounts at different times, ensuring a business has enough money to meet costs.
- Labour budgets: The cost of employing each worker at the company.
» MORE: How do I apply for a business loan?
Budgeting is good for small businesses
Budgets sometimes have to be tight, and small business finance is particularly challenging when you’re just starting out. Even a slight miscalculation of earnings or cost projections can have a significant impact on a burgeoning business.
However, creating a budget can help you weather the storm while you establish your business. Having a good grasp on your finances is key to keeping afloat and growing in the future.
Having a dedicated business bank account may also help you manage your small business’s finances. There are specific accounts for start-ups and for those with bad credit.
For more business articles, visit our business hub.
Image source: Getty Images
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