How to Create a Business Budget

We all know that it’s a challenging time for many small businesses. From difficulties sourcing staff to high energy prices and the prospect of a recession looming, it can be difficult to know how best to prepare for the coming months and years. One way to move forward more confidently is to create a business budget. This will give you a clearer idea of your incomings and outgoings, making you less likely to be impacted by any nasty surprises in your numbers.

What is a business budget? 

A business budget is a detailed plan that outlines where you’ll spend your money each month and across a financial year. As it’s only a forecast, this may not match exactly what happens, but a budget is still incredibly useful in giving you an idea of the money you’re expecting to earn and how much your outgoings will be. It’s also recommended that you review your budget against reality on a regular basis to see how close they are and if your figures need to be amended.

Six things to include in a good business budget

So, what does a useful business budget look like? The good news is that while it sounds like a complex task to build a budget, the key is to keep it simple and flexible. Some key elements must be included, however, such as:

1. Estimated revenue 

The first line of your budget should be how much you expect to bring into the company from the sale of goods and/or services. The easiest way to calculate this is to look at previous years’ income. If you’re a start-up and don’t have this information, look at averages across your industry and make an estimate based on this.  

2. Fixed costs 

You’ll also need to calculate your fixed costs. These are costs such as rent, insurance, wages of any permanent staff and equipment leasing that won’t change.  

3. Variable costs 

Then it’s the turn of your variable costs – those that change according to the volume of work you have. This could include travel, sales commission, shipping and inventory. If you also take on extra staff to cover busy times, these will also count as a variable cost. Variable costs will be closely linked to your cost of goods sold.  

4. One-off costs 

While fixed and variable costs will cover many of your outgoings, it’s also important to factor in any one-off costs you’re likely to have. This could include any start-up costs, moving to new offices, or upgrading equipment and software.  

5. Cash flow

Your cash flow is the final essential information to include in your business budget. Quite simply, this is all the money flowing in and out of your business, so you want to ensure there is more coming in than going out over your accounting period. You can calculate your cash flow by subtracting the amount of money available at the beginning of the accounting period from that left at the end. This should be monitored regularly.  

6. Profit

This line should forecast how much profit you expect to make based on your projected revenue, expenses and cost of goods sold. This is an essential element of your business budget because if the numbers suggest you’re not going to make the profit level you’d like, now is the time to rethink. This could include looking at raising your prices, identifying areas to reduce expenditure, or boosting your marketing activity to attract more business.  

Budgeting for different types of business

While the information above will form the basis of most business budgets, there will be different considerations based on the status of your business and the products or services it offers.

- Start-ups

Perhaps the most challenging budget to create is for a start-up, as you won’t have previous years’ activities to base your numbers on. Top tips here would be to spend time researching industry benchmarks for salaries, rent and marketing costs and speak to your network to find what you can expect to pay for professional fees, equipment and so on. It may also be wise to call on some experts, so consider getting an accountant and lawyer to ensure the basics are done correctly.

- E-commerce business

A significant consideration here that may not impact other businesses as much is shipping and packaging costs and import/export duties. Be sure to factor these into your calculations and research different methods to offer your customers more choices. Digital costs may also be higher for this sector as you must ensure a robust, responsive and reliable digital presence to promote your offering and encourage sales.

- Seasonal business

Most businesses will have busier and quieter times dictated by the activities within their sector, so it’s important to factor any seasonal highs and lows into your budget. If you’re unsure of when these changes may occur, forecasting and reviewing your figures is even more essential as it will help you spot trends and plan accordingly. It will also allow you to identify costs that can be reduced during slower times.

- Inventory business

If you need to stock up on inventory to supply your product, this will be a significant part of your cost of goods sold. Again, it’ll be a case of estimating how much inventory you’ll need based on previous years/industry benchmarks, but don’t forget to look at whether ordering a higher volume of stock makes more financial sense due to lower unit costs. Of course, don’t order more than you think you’ll need and remember to factor in any warehousing and storage costs when doing your budget.

Role of accounting software in budgeting

Whatever the status of your business, accounting software can be the best tool to help you keep on top of your finances and store and access past information to more accurately plan for the future. With accounting software such as AccountsPortal, you can track products and services, add stock and price list items, view a wide range of real-time reports, including Balance Sheets, Profit and Loss statements and more, and with automatic year-end, there’s no need to calculate and roll over year-end balances, it’s all done for you.