Creating a budget is a fundamental step towards achieving financial stability. By understanding your income and tracking your expenses, you can get control over your finances, reduce your stress level and be prepared for unexpected expenses. This is how to make a budget.
What is a business budget?
A business budget is a document t hat outlines your business’ expected income and expenses over a specific period, usually one fiscal year.
A budget can help you
- manage your company’s finances
- predict future performance
- make informed business decisions
- ensure that you can meet your financial obligations
It also ensures that you’re on track to meet the goals you outlined in your business plan.
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Why do you need a budget?
A business budget is essential for many reasons and it’ll help your business survive and thrive. Here are some reasons why you need a budget:
- Financial control and stability: A detailed budget helps you track of and manage your cash flow. This is important because it ensures that your business has enough funds to cover operational expenses and avoid crises. It also helps you prevent overspending.
- Goal setting and planning: A budget helps you set and achieve both short-term and long-term business goals. With it, you can forecast future revenues, expenses, and profits. This helps you with long-term planning.
- Measuring progress: You can regularly compare actual performance against your budget, and see if your business is performing well or underperforming. This also allows you to adjust your business strategy or your business plan as necessary.
- Funding and investment: Banks and investors often require comprehensive financial plans and budgets to assess the viability and profitability of a business. A well-prepared budget displays confidence to your stakeholders, and shows that the business is well-managed and that you’re financially responsible.
A budget is, in other words, a powerful tool for financial management and strategic planning.
What should a business budget include?
There are many things you should include in a budget to ensure a clear and detailed picture of the company’s financial performance. Here are some of the things your business budget should cover:
1. Revenue projections
A revenue projection is an estimate of the amount of money a business expects to generate over a specific period. It includes sales forecasts and additional types of income. The sales forecast estimates the expected revenue from product or service sales based on historical data, market trends, and sales strategies. The additional income includes other sources of income, like investments, grants, interest and so on.
Revenue projections help your business set financial goals, assess the viability of new projects, manage cash flow, and secure funding from investors or lenders.
Did you know you can get a free budget template?
Our free spreadsheet budget template helps you on your way to setting up a solid budget in Excel or Google Sheets.
2. Expense estimates
You should also include an estimate of your expenses. Expenses are divided into fixed, variable, and one-time expenses.
Fixed costs
Fixed costs are regular, recurring expenses that remain relatively consistent each month. Some examples are salaries and wages, insurance, utilities, or loan repayments.
Variable costs
These expenses fluctuate with the level of business activity. It can be raw materials, inventory costs, production or manufacturing costs, sales commissions and shipping and delivery costs.
One-time expenses
One-time costs are simply costs that are non-recurring. These are often related to specific projects or purchases. Some examples are capital expenditures, legal or consulting fees, renovations or office improvements.
See also: How to improve the liquidity of your business
3. Cash flow management
Cash flow is the movement of money in and out of your business. Efficient cash flow management means making sure that your business has sufficient liquidity to operate smoothly and grow. To manage your cash flow, you need to map your inflows and outflows, and track all sources of income, cash, receipts, expenses, account payable and more.
Download our free cash flow forecast template and read how to master cash flow management for small businesses.
4. Profit and loss statement
A profit and loss statement, also known as an P&L statement or income statement, is a financial report that summarizes the revenue, costs, and expenses incurred by a business during a specific period, typically a fiscal quarter or fiscal year. The primary purpose of a P&L statement is to provide a clear overview of your company’s financial performance, showing whether your business has made a profit or incurred a loss during the defined period.
When creating a profit and loss statement, you should subtract your expenses from your income. Every expense and costs should be included.
Gross profit = Total revenue – costs of goods sold
Want an easy way to set up a profit and loss statement?
Our free budget template streamlines the budgeting process, making your financial planning easier. No calculation needed, simply fill out the template in Excel or Google Docs.
If your revenue exceeds your outgoing costs, you are generating a profit. On the other hand, if your costs exceeds your revenue, you are operating at a loss. This can be acceptable for a short time, but consistently operating at a loss is not sustainable in the long run.
5. Balance sheet
A balance sheet provides a picture of your business’s financial worth by detailing the difference between what the business owns and what it owes. On the positive side of the balance sheet, you’ll find
- business assets: This is the value of the physical assets you own, such as work tools, equipment, or real estate.
- cash reserves: Any cash you have in the bank.
- accounts receivable: Invoices that have been sent to clients but have not yet been paid.
On the other side of the balance sheet are your liabilities, such as:
- pending expenses: Bills from suppliers and other expenses that have been incurred but not yet paid.
- taxes payable: Taxes that need to be paid in the near future.
- debts: Loans or other business debts that your company has incurred.
The balance sheet provides a clear picture of your business’s net worth by subtracting your total liabilities from your total assets.
Download our free balance sheet template.
How to make a business budget
A business budget is essential for managing your company’s finances effectively and ensuring long-term success. Here’s a step-by-step guide to making a comprehensive budget:
1. Gather financial information
Collect past financial statements, including income statements, balance sheets, and cash flow statements. This data will provide a baseline for your budget. Make sure you understand the current market conditions, industry trends, and competitive landscape so that you can make informed forecasts.
2. Estimate revenue
Project your future sales based on historical data, market conditions, and sales strategies. Break it down into months, quarters, or a year. Include additional sources of income, such as investments, interest earnings, or grants.
3. Determine and identify costs
Identify costs that are recurring (fixed costs), costs that vary with business activity levels (variable costs), and account for major expenses that are not recurring (one-time costs). It’s important to include administration costs as well, like office supplies, subscriptions, and maintenance of an office or a vehicle.
4. Project cash flow
Estimate when you’ll get paid for the products and services you sell and how much you’ll earn from sales, investments, and other sources. Predict the timing and amount of cash needed to cover operating expenses and other costs as well.
See also: The ultimate guide to liquidity and cash flow
5. Profit and loss projections
Set up a profit and loss statement to show if your company has made a profit or a loss after a specific time period. Subtract the cost of goods sold from total revenue. You should also look at operating and net profit. Subtract operating expenses from gross profit to find your operating profit. For net profit, determine the remaining profit after accounting for all expenses, including taxes and interest. Download a free profit and loss statement template here.
6. Monitor and adjust regularly
Make sure that you regularly compare actual financial performance with your budget to identify discrepancies. Adjust and update the budget as needed, based on market conditions, business priorities and unexpected expenses.
7. Use budgeting tools
We highly recommend using budgeting tools to make this work easier. For example, you can use the free invoice softwareto automate and streamline the invoicing process.
Create invoices for freeBudget calculator
You can get good help from a budget calculator. It can help you to understand where your business stands when you are doing your business budget planning. Gathering all your data in one place can be very helpful.
Do you need a free budget tool? Download our free budget template here.
Helpful business budgeting tools
Using the right tools can simplify the budgeting process and help you maintain accurate financial records. Here are some helpful, free budgeting tools:
