Owning a small business is exciting, but managing finances can be stressful. A well-structured budget can make the difference between growth and financial strain. It helps you make informed decisions, avoid debt, and stay on track toward strategic goals.
In this Remitly guide, we’ll walk through the steps to build a business budget that is both practical and effective, making it easier to focus on growing your business.
Why a business budget is essential for success
A well-planned budget is the key to long-term success for your business. In fact, 82% of small businesses fail due to cash flow issues—a risk that can be minimized with effective budgeting.
Think of your business budget as a roadmap that outlines your company’s revenue, expenses, and financial goals, helping you anticipate costs, manage cash flow, and make decisions for reinvestment to drive strategic growth and stability.
Define your business budget needs
Before diving into numbers, you first need to understand what your budget needs to accomplish. Are you aiming for exponential growth or financial stability? Are you seeking investors, or are you trying to cut costs? Your budget should reflect the specific goals and operational needs of your business.
To define your business budget needs, you’ll want to consider the following aspects:
- Business size: The level of detail in your budget will depend on the stage of your business. A startup might need a detailed monthly budget to track expenses and revenue projections, whereas a more established business might focus on annual financial planning.
- Industry: Budgeting needs vary by sector. A tech company’s needs will differ from those of an e-commerce business.
- Goals: What are your short-term and long-term business goals? Your budget needs to align with these goals, whether you plan to expand, invest in new technology, or are trying to cut costs.
- Funding & cash flow: How is your business funded? Do you rely on personal savings, loans, or investors? Do you have steady, predictable income?
Understanding the importance of a business budget
A business budget is crucial for the financial health of a small business because it:
- Provides financial clarity by showing you where your money is coming from and where it’s going.
- Prevents overspending by controlling expenses and allocating funds wisely.
- Improves decision-making by providing a clear overview of finances to inform investments and growth strategies.
- Helps secure funding from lenders and investors, as they will need to see a solid financial plan before investing.
- Ensures profitability by tracking income and expenses to maximize profits.
- Reduces financial stress by allowing you to be more in control of your finances.
Key components of an effective business budget
An effective budget includes revenue projections, expenses, cash flow, contingency planning, profit analysis, and strategic planning.
Projected revenue
Estimate expected income based on past trends, market research, and sales forecasts.
Expenses
- Fixed costs: Recurring expenses like rent, salaries, insurance, and loan repayment.
- Variable costs: Fluctuating expenses like raw materials, marketing, and sales commissions.
- Operating expenses: Day-to-day costs like utilities, office supplies, and administrative expenses.
- Capital expenditures: Costs associated with acquiring or improving long-term assets, such as equipment and property.
- Cost of goods sold (COGS): Direct costs for producing or acquiring goods sold by the business.
- Administrative expenses: Overhead costs related to running the business, like salaries, rents, and utilities.
Cash flow management
Track all income sources and expenses to effectively maintain financial stability.
Contingency planning
Set aside funds to cover emergencies, such as market shifts or unexpected expenses.
Profit Analysis
- Profitability: The difference between revenue and total expenses.
- Profit margins: Indicates the profitability of sales and identifies areas for improvement.
Strategic planning
- Strategic alignment: Ensure your budget supports your strategic business goals.
- Goal setting: Establish realistic and measurable financial goals to track progress and make informed decisions.
- Budgeting process: Develop a consistent process for accuracy and efficiency.
- Budget reporting: Use standardized methods to track performance.
5 steps to create your budget
Step 1: Analyze fixed and variable costs
The first step to creating a budget is to list all your expenses, categorizing them into fixed and variable costs.
- Fixed costs remain constant each month, regardless of revenue. These are easy to identify and predict. Take a look at all your recurring monthly expenses, such as rent, salaries, insurance, and loan repayments.
- Variable costs fluctuate based on business activity and require a deeper dive into your business operations. Create a list of all expenses, including utilities, raw materials, marketing, and sales commissions.
Identifying these costs can help you understand your financial obligations, identify cost-saving opportunities, and adjust spending as needed.
Step 2: Project cash flow and revenue
Next, you’ll want to understand cash flow and forecast your revenue. Projecting it accurately is essential to the financial management of your business. Here are a few factors to consider:
- Sales projections: Use past sales data and analyze market trends to forecast revenue.
- Accounts receivable and payable: Monitor invoices and payment obligations to maintain healthy cash flow.
- Seasonal variations: Adjust revenue expectations based on demand fluctuations.
You’ll want to create a cash flow statement that shows the timing of inflows and outflows to help identify potential cash shortages and plan accordingly. If you’re just starting out, it’s better to be conservative with your estimates to prevent overspending and ensure you have enough funds to cover expenses.
Step 3: Allocate resources to meet financial goals
After estimating cash flow and revenue, decide how you want to allocate your funds to meet your strategic objectives. Priorities might include:
- Operational efficiency: Invest in tools, technology, and staffing to improve productivity.
- Debt management: Prioritize paying off high-interest loans to reduce financial burden.
- Growth and expansion: Fund product development, market expansion, and scaling operations.
Step 4: Implement the 50/20/30 budget rule
Originally a personal finance guideline, the 50/20/30 budget rule can be an effective way to manage your business budget:
- 50% for essential costs, like rent, payroll, and operating expenses
- 20% for financial goals, like business growth, investments, and emergency funds
- 30% for discretionary spending, like marketing, training, and research
This rule provides a simple framework for managing your budget while saving for future growth.
Step 5: Plan for unexpected costs with a contingency fund
Emergencies happen, and being prepared can save your business. Set aside at least three to six months’ worth of expenses in a contingency fund to cover equipment breakdowns, legal issues, low months of sales, or other unexpected financial challenges.
Regularly contributing to this contingency fund and ensuring your business insurance coverage aligns with potential risks will help you safeguard your business.
Practical tips for maintaining your budget
Regular monitoring and adjustments
A budget isn’t static and needs to evolve based on business performance and changing financial needs. Here’s how to stay on top of it:
- Set a routine: Review your budget monthly or quarterly to assess income and expenses.
- Track key performance indicators (KPIs): Monitor revenue, profit margins, and cash flow to identify trends.
- Adjust spending: Cut unnecessary costs if expenses exceed projections.
- Plan for fluctuations: Budget for busy and slow seasons to prevent cash flow issues.
Utilize small business budget templates
Budget templates can simplify financial planning and help maintain structure. Using a premade template specifically created for small businesses can save you time and simplify the process, without needing to be a financial guru. Budget spreadsheets offer:
- Structured organization to categorize income, expenses, and savings goals in one place.
- Pre-set formulas to automatically calculate totals and variances.
- Easy comparisons to spot discrepancies between actual spending and budgeted amounts.
Many online platforms offer budget templates tailored for small businesses. Zapier compiled a list of 10 budget templates for different needs. Make sure you choose a template that fits your business model and customize it to match your business.
Incorporate sales and financial forecasting
Sales and financial forecasting are essential for accurate budgeting. Use historical data, market research, and industry trends to predict future sales and revenue. Forecasting tools and techniques, such as moving averages, trend analysis, or regression models, can improve accuracy to help you make more informed decisions.
Use technology for efficiency
Accounting software like QuickBooks can automate tasks, such as tracking expenses, generating reports, and forecasting cash flow, saving you time and improving the accuracy of your budget. Benefits include:
- Automation: Reduces manual data entry and minimizes errors.
- Integration: Syncs with bank accounts, invoicing systems, and tax software.
- Real-time tracking: Provides instant access to financial insights and reports.
- Scalability: Adapts to business growth and changing financial needs.
Evaluating the benefits of a business budget
Better decision-making
A budget helps you accurately prioritize spending, identify inefficiencies, and improve pricing strategies. Financial transparency leads to informed investments and strategic growth decisions.
Improved financial health
Tracking income and expenses helps reduce financial stress, manage cash flow, and achieve your financial goals, leading to increased profitability and stronger creditworthiness.
Business stability and growth
A clear budget supports both short-term stability and long-term expansion efforts by mitigating risks and securing funding.
Recap of budget creation techniques
Creating a successful business budget involves:
- Defining your financial needs and key components
- Analyzing costs and projecting cash flow
- Allocating resources strategically
- Using budgeting methods like the 50/20/30 rule
- Planning for unexpected expenses
- Monitoring and adjusting regularly
Steps towards a sustainable business future
A consistently maintained budget is necessary for long-term success. By managing finances effectively, you can make informed decisions, manage finances effectively, and navigate the challenges of business ownership with confidence.
FAQs
How do you create a realistic business budget?
Start by gathering accurate financial data. Analyze your fixed and variable costs, assess past financial data, project future revenue, and create a cash flow statement. Be conservative about your assumptions and take into account potential risks and uncertainties. You can use a budget template to organize all information or leverage accounting software to streamline tracking.
Which budgeting method works best for businesses?
There isn’t a one-size-fits-all approach to business budgeting, as the best method depends on your business size, goals, and industry. Several budgeting methods exist, each with unique strengths and suitability for different business types and situations. Choosing the right method can significantly impact your financial management and overall business success. Here are some common budgeting methods:
- The 50/20/30 rule allocates 50% of income to essential expenses, 20% to financial goals, and 30% to discretionary spending.
- Zero-based budgeting (ZBB) requires you to justify every expense from scratch each budgeting period, regardless of past budgets. This method improves cost efficiency by eliminating unnecessary expenses, but it can be time-consuming due to its detailed expense review.
- Activity-based budgeting (ABB) allocates costs based on specific business activities. By identifying cost drivers for each activity and assigning expenses accordingly, ABB offers a clearer understanding of operating costs.
Incremental budgeting adjusts the previous budget by adding or subtracting a percentage based on estimated growth or cost fluctuations. It’s simple and efficient, but may not account for inefficiencies carried over from past budgets.