Running a business: How to set up a budget

Creating a budget is helpful in many situations, whether for your business or personal life. Let’s cover the key things you should consider when making a budget.

Briefly explained, a budget is a plan that shows financial expectations over a certain period or for a project. It can be used at all levels and by anyone who wants an overview of the finances of their company or privately.

On the other hand, an account is a record of all financial transactions, documenting how you’ve earned income and where you’ve spent money. This is crucial for maintaining transparency and understanding your financial history.

Before starting a business, it’s a good idea to prepare a start-up budget. This budget helps you identify initial expenses and the capital required to get your business off the ground. Once your business is operational, an operating budget (also known as a profit budget) becomes vital. This budget forecasts expected income and expenses over a certain period, helping you manage ongoing operations.

The primary purpose of a budget is to give you control over your income and expenditure. It provides valuable insights into whether your business is likely to be profitable. Depending on your needs, budgets can be set up for various time frames—weekly, monthly, quarterly, annually, or even for multiple years. This flexibility allows you to tailor your budgeting efforts to meet specific goals and requirements.

By consistently monitoring and adjusting your budgets, you can maintain financial health and make informed decisions that drive success.

Download Conta’s budget template for businesses.

What must be included in a budget?

It is difficult to have a concrete and overarching template for exactly how you set up a budget. A budget is a financial plan, and you can have an infinite number of different budgets in a company or privately.

The vast majority of budgets have a time limit in one way or another. Whether it is linked to a project or actual dates. Besides that, the financial plan for different departments and projects can vary greatly.

Among other things, you have a start-up budget where you estimate what it will cost to start a business, and what it requires of you in start-up capital. You have a profit and loss budget and a liquidity budget, which all companies should have. If your company is to invest, you can set up an investment budget. This way you can continue in many different areas.

Before we take a closer look at some of the most common budgets, we will clarify some words and expressions that are relevant when we talk about budgets.

Budget: Useful explanations

You may have heard of income and payments or costs and payments when it comes to the budget? What is the basic difference? Let’s explain it.

Income

Income is money earned from the sale of goods and services, or gains from shares and interest from bank deposits. For example, if you have sold an item and sent an invoice to your customer, the income will be from the date you sent the invoice and the payment will be when the customer pays the invoice.

Deposit

Deposit is money and capital that is deposited into a company. This could be that a customer pays an invoice, that you put more capital into your company or receive a payment from the bank.

Payment

Payment is money that goes out of an account or cash register to pay, for example, salary and pension or to pay money to suppliers for services or goods.

Cost

A cost can be explained as the consumption of resources measured in money. In everyday speech, expenditure, payment and cost are often mixed up. In terms of accounting, there is a big difference. An expense is a payment obligation that must be paid, then you must pay it. In terms of accounting, it is considered a cost when you consume the product or service.

That is, if you order a pizza, you have an expense you have to pay. When you eat the pizza, the cost therefore takes place.

Before you start a business: start-up budget

During the start-up period, expenses are often greater than income, and it is not unknown that it can take longer than planned to complete the first sale. It might be a good idea to get an overview of what you need, when you need it and what it will cost.

A start-up budget shows how much money you have to expect to spend in the start-up of the business, and will then show what you need in terms of capital. Capital requirements mean how much money you need to have on hand when starting a company. Be sure that what you put in will be enough money to finance the first period of operation.

Which items you should include in a start-up budget will vary based on what you will be doing. You have to map out what you need before you can start delivering what you are going to sell to your customers. Then it might be a good idea to talk to others in the same industry and inquire a little about what kind of start-up costs they had.

Are you going to start a business? It may be a good idea to set up a start-up budget and a business plan before you get started. Read more about the business plan here.

Examples of items that are often in a start-up budget:

• Premises: Rent or purchase, renovation until start-up.
• Furniture: Does the venue need furniture?
• Means of transport: Does your company need a car?
• Office equipment: Office supplies, PC, telephone.
• Production equipment: Necessary equipment for production.
• Inventory: Do you need to have an inventory in place before you start?
• Tools: Necessary tools to perform missions.
• Marketing: Logo, website, domain, Facebook.

Once you have a start-up budget in place, you can start your business. Read more about the types of company forms you can choose from when starting a business.

Essential budgets: liquidity budget and profit budget

Although there are many types of budgets you can create, it’s important to prioritize a profit budget and a liquidity budget.

• Profit and loss budget: This budget outlines your planned income and expenses. It helps you see if your business will be profitable over a certain period. By comparing costs against income, you can estimate how much tax you’ll need to pay and whether your business is making money. This type of budget is often created for a calendar year but can also be set up for shorter periods like months or quarters.
• Liquidity budget: This budget shows your estimated cash inflows and outflows, helping you manage cash flow more effectively. It ensures you have enough cash on hand to meet your short-term obligations and avoid potential financial crunches.

By setting up these two essential budgets, you can better understand your business’s financial health and make informed decisions to drive success.

Result = revenues – costs

In a liquidity budget, you will see if you have money to cover the costs that arise along the way and it is the easiest way to find out if your company has enough money to pay the bills each month. Liquidity budget shows an overview of planned payments and payments in a future period. It therefore shows your company’s liquidity and ability to pay.

Liquidity reserves = estimated receipts – estimated payments

Read more about liquidity budget and how to set it up.

Can I change a budget after it has been set up?

A budget can always be changed along the way, and sometimes it is necessary. Perhaps something unexpected comes up which means that the income coming into the company is much lower than you have budgeted for. Or maybe you will receive much more money than you thought beforehand.

A budget should be a plan to deal with, and it is therefore wise to adjust if necessary along the way. That way, you will get a more correct budget and it will be easier to have control over your finances.

It will be easier to budget correctly after running a business for a few years. Perhaps the income has stabilized and you have most likely gained some richer experiences.

Remember to always have a buffer in your budget should something happen. If you have to change it along the way, it is better to have a little extra that can cover unexpected costs, rather than having to either borrow more capital or cut back on another planned expense.

How budget and overview can provide better liquidity

When you have a good overview of your finances, it is also easier to get better liquidity. This is because you can plan so that you do not spend money beyond your means. Both the profit budget and the liquidity budget will therefore help to give you better liquidity.

Having good liquidity is important for the company to pay all bills and cover its expenses. If you have good liquidity, it can also be easier for others to invest in your company or buy services or products from you, because they see that the company will manage in the future.

It is not always helpful to have a good overview and budget to achieve good liquidity. Sometimes there may be delays in a project, or perhaps you need to be paid quickly. Then you can try invoice sales. You can sell your customer’s invoice to an external party, for a small fee. This is how you get money into your account quickly.

Plan the business and finances

The budget is a plan for the finances of the company with income and costs. Your budget depends on what costs you have and how much you earn for the services or products you sell.

You can plan the goals of the business and how to make money in a business plan. The plan should give you an overview of what the company will do. It is a kind of management plan that explains how your plans will be carried out, how you will get funding, what you will spend money on, how you will run your business and who is involved in the operation.

Read more about how you can create a business plan for your limited liability company.

Budget and accounting – how are they connected?

If you run a business, you’re likely familiar with both budgeting and accounting. While it’s not mandatory to have a budget, maintaining accurate accounts is essential.

A budget is your financial plan, outlining expected income and expenses. Accounting, on the other hand, records the actual income and expenses you’ve incurred. Simply put, the budget is what you plan to happen; the accounts show what actually happened.

The figures from your accounting can help you create or adjust your budget. These real numbers provide a solid foundation for planning future finances.

If you notice a significant difference between your budget and your actual accounts, it’s a signal to review your priorities, targets, income, and costs. You may need to adjust your budget or reconsider your spending to ensure you’re not overspending.

Keeping both a budget and accurate accounts helps ensure your business stays financially healthy and on track.

Get an overview of income and costs

One of the first things you have to do when setting up a budget is to get an overview of what you need for your business, which costs it has and how and what you want to get in income. In the start-up phase of a business, you may want to have lower income and higher costs.

Then you should also have a plan for how you will pay off the extra costs you have for expenses this month. If not, it is quickly done that things can go a little beyond rock and stone.

It can be difficult to have a complete overview of income at the start of a business or when you are growing. This is because each month can be different. If you have a stable income in your company, it will be easier to set up a budget.

It’s smart to have a budget that plans for lower income or surprise expenses. If your budget uses up all your earnings, you might end up short of money that month. So, you need a plan for paying bills and salaries if that happens. It’s also crucial to manage your company’s cash flow well. This way, you’ll still have money to cover costs even if your business isn’t making money for a while.

Budgeting for Individuals

Creating a personal budget works similarly to a business budget, but it’s usually simpler because you have fewer factors to consider, like sales targets or specific income goals.

When setting up a household budget, you start with a fixed monthly amount you can spend. Then, divide this amount based on your planned expenses for the week, month, or whatever timeframe works best for you. The main goal of a budget is not to complicate things but to plan your income and expenses so you can see where your money will go in advance.

For example, let’s say you earn $3000 after tax each month. You can create a budget like this:

• Allocate $1800 for essential expenses such as mortgage or rent, car payments, and other fixed costs.
• Set aside $600 for groceries.
• Reserve the remaining $600 as a buffer or for savings.

This simple form of budgeting gives you a clear overview of your finances.

Remember, there’s no one-size-fits-all template for creating a budget, and it doesn’t need to be complicated. At its core, a budget is a plan for your income and expenses over a certain period, with a small buffer for unexpected costs. Whether for your personal finances or a business, starting with a basic budget helps you gain better control and understanding of your financial situation.