Want to protect the financial health of your small business? You need a business budget. Here's how to create one.
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?
Let’s take a look into how to create a small business budget in five simple, straightforward steps.
But Wait…What’s a Business Budget—and Why Is It Important?
Before we jump into how to create a business budget, let’s quickly cover what a business budget actually is—and why it’s so important for your small business.
A business budget is an overview of your business’ finances. 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.
And, as a financially savvy business owner, you’ll also want to have a budget in place to help you:
- Make sound financial decisions. In many ways, your business budget is 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.
- Identify where to cut spending or grow revenue. Your business budget can help you identify areas to decrease your spending or increase your revenue, which will increase your profitability in the process.
- 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 business budget creation is so important, let’s jump into how to do it.
Step 1: Tally Your Income Sources
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.
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 that add income to 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 a small business
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.
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 cost expenses 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.
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 can help your business scale faster. But when your profits are lower than expected, these variable costs are a great place to cut until you can get your profits up.
At the end of each month, tally your variable 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.
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 into your budget as well.
If you know you have any 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 a sudden or large financial burden.
In addition to 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!
Step 5: Pull It All Together
You’ve gathered all of your income sources and all of your expenses. What’s next? Pulling it all together to get a comprehensive view of your financial standing for the month.
On your business budget, you’ll want to tally your total income and your total expenses (i.e., adding your total fixed costs, variable expenses, 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 a budgeting example to give you an idea of what your new business budget might look like each month:
Hourly Earnings Client A: $5,000
Hourly Earnings Client B: $4,500
Hourly Earnings Client C: $6,000
Product Sales: $1,500
Investment Income: $500
Total Income: $19,500
Payroll costs: $5,000
Website hosting: $50
Government and bank fees: $25
Cell phone: $50
Accounting services: $100
Legal services: $100
Total Fixed Costs: $6,425
Sales commissions: $2,000
Contractor wages: $500
Office electricity bill: $125
Office gas bill: $75
Office water bill: $125
Printing services: $300
Raw materials: $200
Digital advertising costs: $750
Travel & events: $0
Total Variable Expenses: $4,125
Office furniture: $450
Office supplies for new location: $300
December business retreat: $1,000
New time tracking software: $500
Client gifts: $100
Total One-Time Spends: $2,350
Total Expenses: $12,900
Total Income ($19,500) – Total Expenses ($12,900) = Total Net Income ($6,600)
And there you have it. Once you have a clear sense of your profitability of the month, you can use it to make the right financial decisions for your small business moving forward.
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. Or 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 Budget to Stay on Track
Putting in the work to create your budget 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 July 2020.