How to create a small business budget

A version of this article was published in Nov 2022 

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Budgeting is so important for making sure you keep track of your spending and meet your business goals. A simple yet thorough budget can be completed in an evening and can save your business time and money in the long term.

Whether you’re a new or established business, understanding the basics of budgeting is an invaluable skill.

What is a small business budget?

A small business budget is a financial plan that outlines a business’s income and expenses over a specific period, typically monthly, quarterly, or annually. It acts as a roadmap, helping business owners allocate resources effectively, track financial performance, and prepare for future growth.

A well-structured budget provides insight into key areas like revenue, operating costs, and cash flow, ensuring that financial decisions align with the business’s goals. By staying on top of budgeting, small businesses can better manage unexpected expenses and identify opportunities for investment or cost-saving.

Example of a Small Business Budget

Here’s an example of a small business budget that breaks down key financial categories, including revenue streams, fixed and variable costs, one-time expenses, and overall profit. This table provides a clear comparison between projected figures and actual performance, helping you identify variances and refine your financial planning. Use this as a template or reference to create a budget tailored to your business.

Category	Projected(£)	Actual(£)	Variance (£)
Revenue Streams
Product Sales	20,000	19,500	-500
Service Income	10,000	10,200	200
Seasonal Revenue	5,000	4,800	-200
Total Revenue	35,000	34,500	-500
Fixed Costs
Rent/Lease	5,000	5,000	0
Utilities (e.g., Electricity, Water)	1,200	1,250	50
National Insurance	1,500	1,600	100
Insurance (e.g., Business, Property)	1,000	950	-50
Employee Salaries	8,000	8,100	100
Total Fixed Costs	16,700	16,900	200
Variable Costs
Raw Materials	5,000	5,500	500
Marketing Costs	2,500	2,400	-100
Delivery/Shipping	1,200	1,250	50
Travel	1,000	900	-100
Total Variable Costs	9,700	10,050	350
One-Time Costs
Office Equipment	1,000	1,200	200
Software Purchases	500	400	-100
Total One-Time Costs	1,500	1,600	100
Profit Calculation
Total Revenue	35,000	34,500	-500
Total Fixed Costs	16,700	16,900	200
Total Variable Costs	9,700	10,050	350
Total One-Time Costs	1,500	1,600	100
Profit (Net)	7,100	5,950	-1,150

Why do I need a budget?

With a budget, you’ll be able to see how well you’re expecting to perform within a period, and you can monitor actual performance against your original projections.

Budgeting allows you to focus on the true cost of running your business. You’ll be able to spot opportunities to improve the day-to-day running of your business, be prepared for any potential problems and see where you can save money.

10 factors to consider when making a small business budget

A small business budget is a crucial tool for managing income and expenses, ensuring financial success, and achieving business goals. By carefully planning and monitoring your finances, you can allocate resources efficiently, prepare for unexpected costs, and track actual performance against your projections. Here’s how to create a comprehensive and adaptable budget tailored to your business needs:

1. Projected revenue and revenue streams

Start by estimating your projected revenue—the total income you expect from various revenue streams such as product sales, service contracts, or seasonal activities. Use past financial data and historical data to make accurate predictions. For service-based businesses, this might include recurring client payments or project-based income, while seasonal businesses should consider fluctuating demand.

2. Fixed costs

Fixed costs are recurring expenses that don’t change significantly with your business’s activity level. These include rent, insurance, national insurance contributions, and employee-related costs such as minimum wage compliance. Regularly reviewing these expenses can help identify areas where you might cut costs or save money.

3. Variable costs

Variable costs, such as raw materials, marketing costs, and fuel duty, fluctuate based on your business’s operations. For example, higher production levels or increased advertising may lead to higher variable costs. Categorising these separately from fixed costs enables better cash flow management and helps you anticipate financial obligations tied to growth.

4. One-time costs and unexpected expenses

One-time costs, such as purchasing agricultural assets or relocating offices, should be accounted for in a contingency fund. A robust budget also considers unexpected costs like equipment repairs or legal fees, ensuring that financial stability isn’t compromised.

5. Cash flow management

Cash flow is the lifeblood of small businesses. Regularly monitor incoming and outgoing funds to maintain positive cash flow. Use budget templates or a business budget template to simplify this process, enabling you to track costs effectively. Monthly reviews of your cash flow can help identify trends and areas where you might save money or reinvest for growth.

6. Profit margins and financial goals

Profit margins indicate how much you retain after covering business costs. To maximise profits, examine expenses such as business rates, capital gains tax, and national insurance rise, and adjust where necessary. Align your financial goals with your business budget to ensure your income tax and other obligations are met while leaving room for reinvestment.

7. Valuable properties and business asset disposal relief

If your business involves significant investments in valuable properties or assets, consider how business asset disposal relief and other tax changes affect your budget. Plan for the efficient use and disposal of assets to optimise long-term financial success.

8. Budget templates and regular reviews

Using a budget template can streamline the budgeting process, especially for small business owners juggling day-to-day expenses and larger financial obligations. Conduct monthly reviews to compare actual figures with projected revenue and adjust for changes, such as those stemming from an autumn budget or previous government reforms.

9. Avoiding unnecessary expenses and tracking costs

Identify areas where unnecessary expenses, like excessive labour or underperforming marketing campaigns, can be eliminated. Tracking costs and evaluating actual performance ensures that your budget stays relevant and supports your business goals.

10. Contingency planning for business needs

Establishing a contingency fund can safeguard against unexpected events like income shortfalls or market changes. For seasonal businesses, this is particularly crucial to bridge periods of low revenue. Consulting a financial advisor can provide insights into the most suitable budgeting methods for your industry.

By incorporating these steps into your budgeting process, you’ll have a clear, flexible framework that supports your business finances and adapts to evolving circumstances. Allocating resources effectively and staying on top of financial data will help small business owners thrive in a competitive environment.

Tips to follow for creating a small business budget

A budget will show estimated income and expenditure for future periods. As a small business, you’re likely to have one overall operating budget which sets out how much money is needed to run the business over the coming period.

When planning out your budget, remember to think about:

• What products or services will you sell, how much will you charge and will you offer any discounts?
• What are your expected sales, and how much production capacity do you have? (Remember to be realistic!)
• How much will you need to pay suppliers?
• Will you need a helping hand? Look into how much employment costs would be if you needed to hire staff to meet demand.
• Where you require equipment such as a new van, or a computer, do your research and shop around.

Is your cost fixed or variable?

Costs like rent, business rates, utilities or the price of materials often remain fixed, regardless of how your business performs.

Variable costs change with your production and sales, such as hiring extra staff or buying more stock to meet demand.

Don’t get caught out

Give yourself a buffer and plan for a contingency fund in your budget. This will cover any additional costs that you didn’t initially plan for. A good aim is between 5% and 10% of your predicted sales volume.

Just getting started?

It’s always important to remember that when you’re starting out, you don’t have to do everything at once. Keep in control of your costs and don’t try and grow your business too quickly. Focus on the quality of your products and your relationships with your customers.

How often should I prepare a budget?

Many businesses prepare budgets annually, but as a smaller business, you may benefit from more frequent budgets. Stick to it once you have made it and review regularly. You’ll want to update it to reflect any changes to your business, such as:

• New prices
• Expansions
• New products
• New suppliers

Longer-term budgets can become less accurate over time, as more factors influence the budget, so it’s important to review and update on a regular basis.

Using a budgeting template

A simple spreadsheet is an accessible and affordable way of managing your budgeting. You can enter, change and present information easily and clearly. See your sales and spending levels at a glance, and keep track of your projected profits for that period. Invest some time into creating a budgeting template that works for you and update it regularly. You can download a free template from AAT to get you started.

Next steps: take control of your small business budget

1. Set Clear Financial Goals: Identify your short-term and long-term business goals, whether it's increasing profit margins, expanding your services, or managing day-to-day expenses more effectively.
2. Create or Update Your Budget Template: Use a simple spreadsheet or budgeting software to design a budget template tailored to your business needs. Include categories for fixed and variable costs, projected revenue, and one-time expenses.
3. Track and Review Regularly: Monitor actual performance against your budget monthly to identify trends, adjust for changes, and ensure you're on track to meet financial goals.
4. Build a Contingency Fund: Allocate 5-10% of your revenue to cover unexpected costs, such as equipment repairs, legal fees, or seasonal slowdowns.
5. Consult a Financial Advisor: For guidance on complex areas like capital gains tax, business asset disposal relief, or managing national insurance changes, consider seeking professional advice.

By following these steps, you'll have a clear and flexible budgeting process that adapts to the unique challenges and opportunities of running a small business.

Take the next step today

FSB members can access tailored resources, including financial guidance, budgeting templates, and expert advice to help their businesses thrive. Discover how FSB can support your financial planning: FSB Member Benefits.