How To Create A Business Budget In 7 Steps

Budgeting is simple but can make a big impact on your business when done right. This post will show you how to create a business budget to keep your finances on track and plan for your financial future.

If you don’t have a budget for your small business or the one you have needs tweaking, you’re in the right place. We’ll take a look at why your business needs a budget, what you should include, and even some budget specifics based on your industry.

Keep reading to learn how to create a budget for a business.

Why Your Business Needs A Budget

A budget is critical to building a thriving business. Unfortunately, though, many small business owners don’t have a budget in place. According to a survey conducted by Clutch, 50% of small business owners did not have a formal budget in place in 2020. 

Not having a formal budget in place is a misstep that could financially harm your business. Creating and sticking to a budget can help you:

• Accurately assess your business’s cash flow by tracking income and expenses
• Identify areas of unnecessary spending
• Identify areas where costs can be cut
• Identify where revenues are falling short and make adjustments as needed
• Forecast future income, identify trends, and reach your financial goals
• Plan for unexpected expenses and emergencies
• See how much you can afford to borrow if you seek small business funding
• Obtain funding from a lender that requires you to show your budget to qualify

What To Include In Your Small Business Budget

Now that you see the importance of a budget, it’s time to get started in creating one personalized for your business. Gather your documentation and information so that you can start mapping out your budget, which should include the following:

• Income: Identify all sources of income for your business, such as in-store sales and online sales.
• Fixed Expenses: Fixed expenses are the same each month and include things like rent or mortgage payments, insurance premiums, internet, cell phone service, software subscription fees, bank fees, and loan payments.
• Variable Expenses: Variable expenses vary from month to month. These would include higher electricity bills in colder and warmer months or an increase in supplies and inventory during a busy holiday season.
• One-Time Costs: One-time costs are a little more difficult to add to the budget since these aren’t regular, recurring expenses, such as purchasing a new laptop or other equipment.
• Unexpected & Emergency Expenses: Your budget can help you prepare for unforeseen expenses and emergencies, such as repairs or equipment replacement.

Small Business Budget Categories By Industry

Your budget is unique to your business. The categories and numbers will vary based on how your business is performing and how your money is spent. But a few common small business budget categories are used by businesses like yours. Let’s look at some common categories to add to your budget based on your industry.

How To Create A Budget For Your Business In 7 Easy Steps

Ready to create a personalized budget for your business? Follow these steps to get started and create a budget that works for your business.

Step 1: Determine How To Track Your Budget

You can certainly pull out an old notebook and start jotting down numbers. But there are better (and easier!) ways to create and track your budget. These include:

• Spreadsheets: Use Google Sheets or Microsoft Excel to create your budget spreadsheet. You can automatically set up calculations and perform other functions that make tracking your income and expenses quick and easy.
• Budget Templates: Find a business budget template with a quick online search, or look for template options in your spreadsheet or word processing software.
• Accounting Software: Accounting software typically offers basic budgeting. Some accounting programs have advanced features and reports to simplify budgeting. In addition, accounting programs often have other tools that are helpful for your business, such as inventory management, time tracking, and project management. Unsure of where to start? Check out our picks for the best small business accounting software.

Step 2: Gather Income & Expense Documentation & Information

Your business budget includes your income and expenses. For accurate calculations, gather information and documentation that proves these numbers instead of simply estimating.

To calculate your income, you’ll need the following:

• Bank statements
• Customer invoices
• Copies of sales receipts
• Financial statements

For expenses, you’ll need documentation such as:

• Monthly utility bills
• Lease agreements
• Loan contracts

Step 3: Identify Fixed, Variable, & One-Time Expenses

The next step is categorizing your expenses as fixed, variable, and one-time expenses.

Some expenses may differ based on your business model. For example, payroll expenses for a small business with an employee or two may remain fixed for longer. On the other hand, payroll for seasonal businesses or businesses that pay commissions based on sales may be categorized as a variable expense.

Step 4: Calculate Your Profit Or Loss

It’s time to crunch some numbers! Start with the previous month. Add together all revenue streams to get your total income for the month. Next, total your fixed expenses, variable expenses, and one-time expenses. Calculate each category separately, then add the three numbers. Subtract this number from your total income. This leaves you with your profit (or loss) for the month.

Sound complicated? Let’s see this in action in an example:

Income

• In-Store Sales: $5,000
• Online Sales: $1,000
• Total Monthly Income: $6,000

Fixed Expenses

• Rent: $800
• Internet: $60
• Cell Phone Service: $80
• Insurance Premium: $200
• Payroll: $3,000
• Total Fixed Expenses: $4,140

Variable Expenses

• Electric Bill: $150
• Water Bill: $70
• Supplies: $50
• Inventory: $250
• Total Variable Expenses: $520

One-Time Expenses

• New Laptop: $600
• Total One-Time Expenses: $600

Now, let’s take these expenses and add them together.

Fixed Expenses + Variable Expenses + One-Time Expenses = Total Monthly Expenses

$4,140 + 520 + 600 = $5,260

Your total income for the month is $6,000. Now, subtract the total expenses of $5,260 to calculate your profit.

Income – Expenses = Profit

$6,000 – $5,260 = $740

For the month, you made a profit of $740.

You can continue this process, working back through each month to get an idea of your monthly expenses and income. By gathering this historical data, you can see key facts and figures, such as slow periods when revenue is down and areas to cut costs. While not an exact science, this better prepares you for future planning and reaching your financial goals.

One last thing to note: An unexpected expense can impact the most organized budget. Make sure to set up an emergency fund to account for these events.

You can also look into options such as business lines of credit or business credit cards to provide an extra cash buffer for expenses you can’t plan for.

Step 5: Cut Costs To Boost Profitability

The next step is to look over your data and determine if there are any areas where costs can be cut. Some ways that you can cut costs include:

• Not purchasing additional inventory during slower sales periods
• Changing vendors
• Streamlining your marketing
• Negotiating with your cell phone carrier to reduce your monthly payment
• Switch insurance providers

Though it seems minor, these savings can add up over time, boosting your profitability.

Step 6: Plan For The Future Of Your Business

Use the historical data you’ve gathered to plan for your future. If you’re consistently in the red (or not bringing in the income you need to expand your business), ask yourself what changes you need to make.

Does it make sense to keep your store open if you operate a seasonal business that doesn’t bring in much money during the summer? Maybe it’s more cost-efficient to close your store or bring your products/services online during these slow periods. Or perhaps you need to ramp up your marketing campaign to reel in new customers.

If your income looks pretty good after deducting expenses, is there something you can do to take your business to the next level? Does upgrading or adding equipment to serve your customers makes sense? Would your business benefit from an extra employee? Now is the time to evaluate the needs of your business, look at the financials, and determine your next steps.

Step 7: Stick To Your Budget

A budget is nothing but a piece of paper (or spreadsheet) if you don’t stick to it. Watch out for overspending, cut costs where necessary, and adjust your budget as needed to account for any changes in your business.

The Bottom Line On Creating A Budget For Your Small Business

Taking the time to work on small business budgeting comes with big benefits. A budget gives you an in-depth look at the financial health of your business, helping you identify changes that need to be made within your organization. This data can be used to tackle current financial issues while also helping you plan for a successful and profitable future.

Good luck!

Small Business Budgeting FAQs