How To Create Business Budgets For Small Businesses

Josef Mohamed
Josef Mohamed
April 30, 2023

You want to know how to create business budgets for your small business? Well, you’ve come to the right place. As a business owner, I know firsthand how important it is to have a solid budget.

19% of businesses with ten or fewer workers failed to make any budgeting plans in 2020. That’s a lot of the companies that could potentially be caught off guard by unexpected costs.

But don’t worry! With a little bit of planning and organization, creating a business budget can be a simple and effective process. In this guide, I’ll walk you through the actions for creating a budget to help you keep your business finances on track. By this end, you’ll feel confident and in control of your finances. So let’s get started.

What Is Business Budgets?

the definition of business budgets and how to create one

Business budgets are a crucial part of any successful enterprise. Simply put, it’s a financial plan to help guide your business’s spending during a specific period.

Understanding your cash flow is critical, enabling you to forecast future expenses and revenue accurately. In addition, variable fees, such as staffing and inventory, will fluctuate, making it essential to keep track of these costs so you don’t overspend.

Fixed costs, on the other hand, such as rent and utilities, will remain static, so it’s vital to allocate funds properly to prevent overspending. By setting up a realistic budget, you can gain the discipline and focus you need to grow your business while controlling expenses.

A surefire way to avoid overspending is to regularly review your budget and adjust it based on your business’s needs. As someone who used to run a small business, I can vouch that having a well-planned budget helped me to manage financial risks effectively and grow my company.

Why you need a business budget

Here are some reasons why a small business budget is crucial for small business owners, especially when it comes to variable costs:

  • It helps to identify your expenses and revenues to understand your financial position better.
  • It allows you to track and manage your spending by monitoring your variable costs.
  • It helps you make informed financial decisions to minimize losses and maximize profits.
  • It provides a roadmap for revenue generation and helps you allocate resources efficiently.
  • It enables you to stay focused on your goals and plan for the future of your business.
  • It provides a basis for performance measurement, helping you to monitor your business’s progress over time.
  • Assists in identifying areas where you can cut costs or reallocate resources to improve profitability.
  • Overall, a budget is essential for small business owners in managing costs and making informed financial decisions.

How To Create Business Budgets 7-Steps Guide:

Creating a business budget can seem daunting, but it’s essential to financial management and success. Here are seven steps you can follow to start a business budget:

1.) Examine your revenue

As a small business owner, examining your revenue is essential when creating your business budget. Not only does this help you keep track of your business performance, it also enables you to forecast revenue growth in the upcoming months.

It’s a common mistake to overlook analyzing your revenue, leading to underestimating expenses and overestimating profits. Trust me; I’ve been there. When I started my business, I didn’t pay much attention to my revenue and struggled to profit.

But once I began examining my revenue, I could make informed decisions about my expenses and investments, ultimately leading to revenue growth. So, please don’t make the same mistake I did. Instead, take the time to examine your revenue and watch your business take off thoroughly.

2.) Make lists of all your expenses, both fixed and variable

Business budgets are an essential component of any organization’s financial planning. One crucial step in creating a business budget is listing all your expenses.

This includes fixed costs like rent and salaries and variable costs like office supplies and marketing expenses. Not only does this help you to have a clear understanding of where your spending money is going, but it enables you to make informed decisions about which costs are necessary and which can be reduced or eliminated.

fixed costs vs. variable costs

Here are examples of fixed costs and variable costs that a business might incur

Fixed costs:

  • Rent for your office or storefront
  • Salaries or wages for full-time staff
  • Insurance premiums
  • Property taxes
  • Interest on business loans
  • Equipment leases or financing
  • Website hosting fees

Variable costs:

  • Cost of raw materials
  • Hourly or project-based wages for freelance or temporary staff
  • Advertising and marketing expenses
  • Travel expenses
  • Sales commissions
  • Office Supplies
  • Utilities (such as electricity or water)

It’s important to mention that some expenses may fall into both categories, depending on the situation. For example, an office space rental may be a fixed monthly cost, but renting additional space for a limited time for a particular project may be considered a variable cost.

Creating a comprehensive list of business expenses ensures a realistic budget that aligns with your plans and financial limitations.

3.) Set realistic goals

Setting realistic goals is critical when creating business budgets. It starts with deeply diving into your profit and loss statement to analyze your monthly income.

Once you understand your financial situation, you can start setting achievable goals. Why is this important?

Setting too lofty goals can result in disappointment and frustration when those goals aren’t met.

Plus, unrealistic goals can lead to an equally unrealistic budget and financial troubles. However, you can create an attainable and productive budget by setting realistic goals for your specific business.

Trust me; it’s one of the most important steps you can take to ensure the success of your business.

4.) Choose a budgeting strategy

Your budgeting strategy is one of the most critical factors in business budget planning. Choosing the right design might seem tedious, but it can significantly impact your financial success.

Think about it this way: if you choose a budgeting strategy that focuses solely on cutting costs, you might save some money in the short term, but in a long time, you could miss out on chances to invest in your company and ultimately make more money.

On the other hand, if your budgeting strategy is too lax, you could end up overspending on things like marketing costs without seeing any real return on investment.

So, take the time to research and experiment with different budgeting strategies and find the one that works best for your business goals. Your bottom line will thank you.

5.) Establish priorities

It might not sound like a compelling strategy, but trust me; it’s a massive step in creating an adequate budget. Without clear priorities, it’s far too easy to get bogged down in frivolous expenses and forgets about the bigger picture.

Let’s face it; nobody likes to deal with accounting software full of mismatched numbers and chaotic spreadsheets. But on the other hand, prioritizing where your money goes ensures that you’re making smart investments in your business and setting yourself up for long-term success.

So, take the time to think about your priorities and consider how they fit into your overall business finance plan. Then, you won’t regret it.

6.) Review and adjust regularly

Yes, I understand what to do. However, reviewing and adjusting regularly is a huge step when creating business budgets because it allows businesses to maintain financial health and pursue professional development.

By regularly reviewing budgets, businesses can identify areas of opportunity or areas that need adjustment. This information can help companies make informed financial decisions that contribute to their growth and success.

Adjusting the budget as necessary ensures that the company stays on track with spending and revenue goals. Ultimately, regular budget reviews and adjustments are vital for companies that want to achieve financial health and continue to pursue professional development opportunities.

7.) Monitor cash flow

Maintaining a close eye on cash flow is essential when developing business budgets, not just because it’s standard accounting practice. After all, your operating budget is one of the most critical documents in your business toolkit, and it keeps you on track toward achieving your financial goals.

It’s where you’ll list all your operating costs, such as rent, utilities, and employee wages, and it’s what you’ll use to determine how much you should allocate to other areas, like marketing or investments.

Failing to monitor cash flow while creating a budget leaves you blind to necessary expenses and can result in making uninformed decisions that could negatively impact your business.

Final Thoughts:

In conclusion, creating a budget for your small business may seem overwhelming, but it is a critical step in assuring the success of your enterprise. As a small business owner, I understand the importance of budgeting and its impact on my bottom line.

Following the above actions can develop a realistic and practical budget for achieving your business goals. Then, regularly review and adjust your budget to ensure it remains relevant and valuable.

By prioritizing your finances and staying on top of your budget, you can set yourself and your business up for long-term success. So go ahead, start budgeting, and watch your business grow.


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About The Author

Meet Josef, a seasoned Content Marketer, SEO Strategist, and Web Designer who has over a decade of experience helping entrepreneurs build and grow their online businesses. He is a trusted authority in the field of Marketing and Technology and is renowned for his in-depth knowledge and expertise in testing and recommending the best products to help businesses succeed.

Disclosure: Some of the links in this article may be affiliate links, which can provide compensation to me at no cost to you if you decide to purchase a paid plan. These are products I’ve personally used and stand behind. This site is not intended to provide financial advice and is for entertainment only. 

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