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How to Create a Business Budget in 4 Simple Steps

While the task of creating a business budget might seem tedious, this is a step you should take. Business budgets prevent you from looking at only short-term income and expenses and allow you to look forward a year, or even longer, if you should decide to create a long-term budget.
Two People Creating a Business Budget


Why Budgeting Matters for Your Business 

Regardless of the size of your business, it is always a good idea to have a budget. Having a budget can help you with some of the following:

  • Strategic planning and decision-making – a budget provides a framework for strategic planning and informed decision-making. It allows you to allocate resources effectively, prioritize initiatives, and pursue growth opportunities with confidence.  
  • Managing expectations — budgets serve as a reality check, especially for businesses with seasonal fluctuations. Regularly reviewing your budget helps you stay on target and adjust as needed.  
  • Debt mitigation — your budget can help your business avoid piling up debts. A budget can be used as a tool to help you understand where you need additional capital. You may also determine where it is possible to cut expenses to find that capital. 
  • Investment opportunities — if you are fortunate enough to have extra cash in your budget, you can identify potential reinvestment opportunities which may lead to increased efficiency in your business. 

These are just a few of the reasons why having a budget for your small business matters. Remember, budgets are not a “set it and forget it” tool, they can and should be reviewed regularly and changes can be made as needed to adjust for the unexpected. 

Preparing Your Small Business Budget 

Your budget should be realistic. Whether you have been in business less than a year, more than a year, or a decade, there are certain documents which will help you craft a budget that is reasonable. Here’s what you need: 

  • Financial information — historical profit and loss statements, balance sheets, and cash flow statements are the first items you should gather. These documents will give you a clear picture of what you can expect. If you are still not through your first year, gather all your financial information and prepare these statements.  
  • Sources of revenue — understanding what revenue your business can anticipate over the year helps significantly when creating a budget. Do not overlook investment income, interest income, sales, or income for services rendered. 
  • Categorize expenses — not all expenses are the same month to month. Categorize these expenses between fixed expenses (e.g., insurance payments, lease payments on autos or equipment, salaries and benefits) and variable expenses (e.g., renovations, equipment breakdowns) to accurately project your costs 

Once you have gathered this information, you will be ready to take the steps necessary to create your small business budget. 

Step One: Estimating Your Income 

To estimate your income over the next year, you can rely on a combination of items including your business plan, historical information which you gathered earlier, and your plans for the upcoming year. Remember, you want to be optimistic when estimating your income, but always remain realistic.  

Step Two: Projecting Your Expenses 

Expense projections are a bit more challenging to project than income. Over the next year, your interest rates on variable notes could change, you may opt to hire additional staff, or you could have an equipment breakdown. The best option is to project your expenses based on historical data as is available. Be sure to factor in changes which could occur due to inflation and other potential cost increases. 

Step Three: Creating a Cash Flow Projection 

Your cash flow projections should be based on income and expense estimates. This can help you identify potential cash shortages or surpluses in each month. Do not forget to allow for seasonal fluctuations your business may be facing. 

Step Four: Make Allowances for Contingency Funds 

When creating your budget, you should allocate a portion for emergency situations or for unexpected expenses. If you own your facility, you may need to have a repair fund. If you anticipate needing additional staffing, you want to make sure you have those potential additional expenses available to you to avoid having a negative impact on your productivity and sales. 

After Creating a Small Business Budget 

You may think that once your budget is complete your work is done. Nothing could be further from the facts. Once you have created your budget, being proactive can help you monitor for potential pitfalls. Some of the steps you can take include: 

  • Regular monitoring and adjusting — When you monitor your actual income and expenses against the amounts in your budget, you can adjust as needed to allow you to stay on track. This will also help you avoid any discrepancies and help you avoid taking on debt.
  • Reviewing and refining — After your fiscal year ends, you should review your actual numbers against your budget. This review will serve two purposes: first, it will help you identify the areas where you were overly optimistic or not optimistic enough. Second, this review will allow you to adjust your next year’s budget based on this information. 

An effective small business budget can help support the growth and long-term success of your business. Your budget can help you manage your finances and can encourage you to remain proactive in identifying potential issues. 

The Business Advisors at Baker Boyer are here to help you make the most of your income and make sure that you have the tools you need to manage your business. Contact us today by filling out our online form or call (509) 525-2000 and let us help.