How to Create a Small Business Budget in 5 Simple Steps

Want to protect the financial health of your small business? You need a business budget. Here's how to create one.

business budget

When you build a business, there are a lot of things to stay on top of, from marketing and finding new clients to building a website and establishing your digital presence. But there’s one element that you want to stay on top of from the very beginning—and that’s your business budget.

Having a detailed and accurate budget is a must if you want to build a thriving, sustainable business. But how, exactly, do you create one? What are the steps for business budget planning?

As a small business owner, let’s take a look at how to create a business budget in five simple, straightforward steps.

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    What’s a Business Budget—and Why Is It Important?

    Before we jump into creating a business budget, let’s quickly cover what a business budget is—and why it’s so important for small businesses.

    A business budget is an overview of your business funds. It outlines key information on both the current state of your finances (including income and expenses) and your long-term financial goals. Because your budget will play a key role in making sound financial decisions for your business, it should be one of the first tasks you tackle to improve business success.

    And, as a financially savvy owners, you’ll also want to have a budget in place to help you:

    • Make sound financial decisions. In many ways, your business budgets are like a financial road map. It helps you evaluate where your business finances currently stand—and what you need to do to hit your financial goals in the future for business growth.
    • Identify where to cut spending or grow revenue. Your business budgets can help you identify areas to decrease your spending or increase your revenue, which will increase your profitability in the process, outline unexpected costs, and help your sustain your business goals.
    • Land funding to grow your business. If you’re planning to apply for a business loan or raise funding from investors, you’ll need to provide a detailed budget that outlines your income and expenses.

    Now that you understand why budget creation is so important to your business decisions, let’s jump into how to do it.

    Business Budget Step 1: Tally Your Income Sources

    mastering cash flow

    First things first. When building a small business budget, you need to figure out how much money your business is bringing in each month and where that money is coming from – this will hep create an operating budget based on your business income.

    Your sales figures (which you can access using the Profit & Loss report function in FreshBooks) are a great place to start. From there, you can add any other sources of income for your business throughout the month.

    Your total number of income sources will depend on your business model.

    For example, if you run a freelance writing business, you might have multiple sources of income from:

    • Freelance writing projects
    • A writing course you sell on your website
    • Consulting with other writers who are starting small businesses

    Or, if you run a brick-and-mortar retail business, you may only have one source of income from your store sales.

    However many income sources you have, make sure to account for any and all income that’s flowing into your business—then tally all those sources to get a clear picture of your total monthly income to build your master business budget template.

    Business Budget Step 2: Determine Fixed Costs

    Once you’ve got a handle on your income, it’s time to get a handle of your costs—starting with fixed costs.

    Your fixed costs are any expenses that stay the same from month to month. This can include expenses like rent, certain utilities (like internet or phone plans), website hosting, and payroll costs.

    Review your expenses (either via your bank statements or through your FreshBooks reports) and see which costs have stayed the same from month to month. These are the expenses you’re going to categorize as fixed costs.

    Once these costs are determined, add them together to get your total fixed and variable costs expense for the month.

    TIP:  If you’re just starting your business and don’t have financial data to review, make sure to use projected costs. For example, if you’ve signed a lease for office space, use the monthly rent you will pay moving forward.

    Business Budget Step 3: Include Variable Expenses

    Variable costs don’t come with a fixed price tag—and will vary each month based on your business performance and activity. These can include things like usage-based utilities (like electricity or gas), shipping costs, sales commissions, or travel costs.

    Variable expenses will, by definition, change from month to month. When your profits are higher than expected, you can spend more on the variables that will help your business scale faster. But when your profits are lower than expected, consider cutting these variable costs until you can get your profits up.

    At the end of each month, tally these expenses. Over time, you’ll get a sense of how these expenses fluctuate with your business performance or during certain months, which can help you make more accurate financial projections and budget accordingly.

    Business Budget Step 4: Predict One-Time Spends

    Many of your business expenses will be regular expenses that you pay for each month, whether they’re fixed or variable costs. But there are also costs that will happen far less frequently. Just don’t forget to factor those expenses when you create a budget as well.

    If you know you have one-time spends on the horizon (for example, an upcoming business course or a new laptop), adding them to your budget can help you set aside the financial resources necessary to cover those expenses—and protect your business from unexpected costs in the form of a sudden or large financial burden.

    On top of adding planned one-time spends to your budget, you should also add a buffer to cover any unplanned purchases or expenses, like fixing a damaged cell phone or hiring an IT consultant to deal with a security breach. That way, when an unexpected expense pops up (and they always do), you’re prepared!

    Business Budget Step 5: Pull It All Together

    You’ve gathered all of your income sources and all of your revenue and expenses. What’s next? Pulling it all together to get a comprehensive view of your financial standing for the month.

    On your businesses master budget, you’ll want to tally your total income and your total expenses (i.e., adding your total fixed costs, variable expenses, cost of goods, and one-time spends)—then compare cash flow in (income) to cash flow out (expenses) to determine your overall profitability.

    Having a hard time visualizing what a business budget looks like in action? Here’s an operating budget example to give you an idea of what your new business budget might look like each month:


    A Client Hourly Earnings: $5,000
    B Client Hourly Earnings: $4,500
    C Client Hourly Earnings: $6,000
    Product Sales: $1,500
    Loans: $1,000
    Savings: $1,000
    Investment Income: $500

    Total Income: $19,500


    Fixed Costs

    Rent: $1,000
    Internet: $50
    Payroll costs: $5,000
    Website hosting: $50
    Insurance: $50
    Government and bank fees: $25
    Cell phone: $50
    Accounting services: $100
    Legal services: $100

    Total Fixed Costs: $6,425

    Variable Expenses

    Sales commissions: $2,000
    Contractor wages: $500
    Electricity bill: $125
    Gas bill: $75
    Water bill: $125
    Printing services: $300
    Raw materials: $200
    Digital advertising costs: $750
    Travel and events: $0
    Transportation: $50

    Total Variable Expenses: $4,125

    One-Time Spends

    Office furniture: $450
    Office supplies for new location: $300
    December business retreat: $1,000
    New time tracking software: $500
    Client gifts: $100

    One-Time Spends: $2,350

    Expenses: $12,900

    Total Income ($19,500) – Total Expenses ($12,900) = Total Net Income ($6,600)

    Above all, once you have a clear sense of your profitability for the month, you can use it to make the right financial decisions for your small business moving forward.

    strong business foundation

    For example, if you realize you’re in the red and spending more than you earn, you might cut your spending and focus on finding new clients. Alternatively, if your income is significantly higher than your expenses, you might consider investing your profits back into your business (like investing in new software or equipment).

    Use Your Business Budget to Stay on Track

    Putting in the work to create a budget for your small business may seem like a hassle. But while it takes a bit of time and energy, it’s worth the extra effort. Thorough business budgeting gives you the financial insights you need to make the right decisions for your business to grow, scale, and prosper in the future.

    This post was updated in October 2023

    Deanna deBara

    Written by Deanna deBara, Freelance Contributor

    Posted on June 20, 2017