What is a business budget?
A budget is a detailed plan that outlines where you’ll spend your money monthly or annually.
You give every dollar a “job,” based on what you think is the best use of your business funds, and then go back and compare your plan with reality to see how you did.
A budget will help you:
- Forecast what money you expect to earn
- Plan where to spend that revenue
- See the difference between your plan and reality
What makes a good budget?
The best budgets are simple and flexible. If circumstances change (as they do), your budget can flex to give you a clear picture of where you stand at all times.
Every good budget should include seven components:
1. Your estimated revenue
This is the amount you expect to make from the sale of goods or services. It’s all of the cash you bring in the door, regardless of what you spent to get there. This is the first line on your budget. It can be based on last year’s numbers or (if you’re a startup), based on industry averages.
2. Your fixed costs
These are all your regular, consistent costs that don’t change according to how much you make—things like rent, insurance, utilities, bank fees, accounting and legal services, and equipment leasing.
Further reading: Fixed Costs (Everything You Need to Know)
3. Your variable costs
These change according to production or sales volume and are closely related to “costs of goods sold,” i.e., anything related to the production or purchase of the product your business sells. Variable costs might include raw materials, inventory, production costs, packaging, or shipping. Other variable costs can include sales commission, credit card fees, and travel. A clear budget plan outlines what you expect to spend on all these costs.
The cost of salaries can fall under both fixed and variable costs. For example, your core in-house team is usually associated with fixed costs, while production or manufacturing teams—anything related to the production of goods—are treated as variable costs. Make sure you file your different salary costs in the correct area of your budget.
Further reading: Variable Costs (A Simple Guide)
4. Your one-off costs
One-off costs fall outside the usual work your business does. These are startup costs like moving offices, equipment, furniture, and software, as well as other costs related to launch and research.
5. Your cash flow
Cash flow is all money traveling into and out of a business. You have positive cash flow if there is more money coming into your business over a set period of time than going out. This is most easily calculated by subtracting the amount of money available at the beginning of a set period of time and at the end.
Since cash flow is the oxygen of every business, make sure you monitor this weekly, or at least monthly. You could be raking it in and still not have enough money on hand to pay your suppliers.
6. Your profit
Profit is what you take home after deducting your expenses from your revenue. Growing profits mean a growing business. Here you’ll plan out how much profit you plan to make based on your projected revenue, expenses, and cost of goods sold. If the difference between revenue and expenses (aka “profit margins”) aren’t where you’d like them to be, you need to rethink your cost of goods sold and consider raising prices.
Or, if you think you can’t squeeze any more profit margin out of your business, consider boosting the Advertising and Promotions line in your budget to increase total sales.
7. A budget calculator
A budget calculator can help you see exactly where you stand when it comes to your business budget planning. It might sound obvious, but getting all the numbers in your budget in one easy-to-read summary is really helpful.
In your spreadsheet, create a summary page with a row for each of the budget categories above. This is the framework of your basic budget. Then, next to each category, list the total amount you’ve budgeted. Finally, create another column to the right—when the time period ends, use it to record the actual amounts spent in each category. This gives you a snapshot of your budget that’s easy to find without diving into layers of crowded spreadsheets.
See the sample below.
Pro tip: link the totals on the summary page to the original sums in your other budget tabs. That way when you update any figures, your budget summary gets updated at the same time. The result: your very own budget calculator.
You can also check out this simple Startup Cost Calculator from CardConnect. It lays out some of the most common expenses that you might not have considered. From there, you can customize a rough budget for your own industry.
Small business budgets for different types of company
While every good budget has the same framework, you’ll need to think about the unique budgeting quirks of your industry and business type.
Seasonal businesses
If your business has a busy season and a slow season, budgeting is doubly important.
Because your business isn’t consistent each month, a budget gives you a good view of past and present data to predict future cash flow. Forecasting in this way helps you spot annual trends, see how much money you need to get you through the slow months, and look for opportunities to cut costs to offset the low season. You can use your slow season to plan for the next year, negotiate with vendors, and build customer loyalty through engagement.
Don’t assume the same thing will happen every year, though. Just like any budget, forecasting is a process that evolves. So start with what you know, and if you don’t know something—like what kind of unexpected costs might pop up next quarter—just give it your best guess. Better to set aside money for an emergency that doesn’t happen than to be blindsided.
Ecommerce businesses
The main budgeting factor for ecommerce is shipping. Shipping costs (and potential import duties) can have a huge impact.
Do you have space in your budget to cover shipping to customers? If not, do you have an alternative strategy that’s in line with your budget—like flat rate shipping or real-time shipping quotes for customers? Packaging can affect shipping rates, so factor that into your cost of goods sold too. While you’re at it, consider any international warehousing costs and duties.
You’ll also want to create the best online shopping experience for your customers, so make sure you include a good web hosting service, web design, product photography, advertising, blogging, and social media in your budget.
Inventory businesses
If you need to stock up on inventory to meet demand, factor this into your cost of goods sold. Use the previous year’s sales or industry benchmarks to take a best guess at the amount of inventory you need. A little upfront research will help ensure you’re getting the best prices from your vendors and shipping the right amount to satisfy need, mitigate shipping costs, and fit within your budget.
The volume of inventory might affect your pricing. For example, if you order more stock, your cost per unit will be lower, but your overall spend will be higher. Make sure this is factored into your budget and pricing, and that the volume ordered isn’t greater than actual product demand.
You may also need to include the cost of storage solutions or disposal of leftover stock.
Custom order businesses
When creating custom ordered goods, factor in labor time and cost of operations and materials. These vary from order to order, so make an average estimate.
Startups
Budgeting is tricky for startups—you rarely have an existing model to use. Do your due diligence by researching industry benchmarks for salaries, rent, and marketing costs. Ask your network what you can expect to pay for professional fees, benefits, and equipment. Set aside a portion of your budget for advisors—accountants, lawyers, that kind of thing. A few thousand dollars upfront could save you thousands more in legal fees and inefficiencies later on.
This is just scratching the surface, and there’s plenty more to consider when creating a budget for a startup. This business startup budget guide from The Balance is a great start.
Service businesses
If you don’t have a physical product, focus on projected sales, revenue, salaries, and consultant costs. Figures in these industries—whether accounting, legal services, creative, or insurance—can vary greatly, which means budgets need flexibility. These figures are reliant on the number of people required to provide the service, the cost of their time, and fluctuating customer demand.
Small business budgeting templates
A business budget template can be as simple as a table or as complex as a multi-page spreadsheet. Just make sure you’re creating something that you’ll actually use.
Create your budget yearly—a 12-month budget is standard fare—with quarterly or monthly updates and check-ins to ensure you’re on track.
Here are some of our favorite templates for you to plug into and get rolling.
- The Balance has a clear table template that lists every budget item, the budgeted amount, the actual amount, and the difference between the two. Use this one if you’re looking to keep it simple.
- Capterra has both monthly and annual breakdowns in their Excel download. It’s straightforward, thorough, and fairly foolproof.
- Google Sheets has plenty of budget templates hiding right under your nose. They’re easy to use, and they translate your figures into clear tables and charts on a concise, visual summary page.
- Smartsheet has multiple resources for small businesses, including 12-month budget spreadsheets, department budget templates, projection templates, project-by-project templates, and startup templates. These templates are ideal if you’re looking for a little more detail.
- Scott’s Marketplace is a blog for small businesses. Their budget template comes with step-by-step instructions that make it dead simple for anyone.
- Vertex42 focuses on Excel spreadsheets and offers templates for both product-based and service-based businesses, as well as a business startup costs template for anyone launching a new business.
Budgeting + bookkeeping = a match made in heaven
Making a budget is kind of like dreaming: it’s mostly pretend. But when you can start pulling on accurate historical financials to plan the upcoming year, and when you can check your budget against real numbers, that’s when budgets start to become useful.
The only way to get accurate financial data is through consistent bookkeeping.
Don’t have a regular bookkeeping process down pat? Check out our free guide, Bookkeeping Basics for Entrepreneurs. We’ll walk you through everything you need to know to get going yourself, for free.
If you need a bit more help, get in touch with us. Bookkeeping isn’t for everyone, especially when you’re also trying to stay on top of a growing business—but at Bench, bookkeeping is what we do best.
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