Building a budget for small businesses

Quick insights

• Creating a budget can help small business owners manage their cash flow.
• Before business owners create a budget, they may want to analyze their typical spending patterns.
• It may be beneficial to revisit the budget over time to refine it and identify cost-saving opportunities.

There are many facets to managing finances for a business. This might include employee payroll, insurance, office rent and unexpected one-time costs.

Creating a budget may be a helpful way for small business owners to stay on track for short-term and long-term financial goals. But before creating a formal budget, it may be wise to review ongoing business expenses and account for variable expenses as they come up.

Read on to learn about the basics of small business budgeting and steps for creating your own budget.

Small business budgeting basics

Sticking to a budget may be important for growing a business, especially one that is new. Here are a few important terms you may want to know before we discuss steps for setting up a budget:

• Fixed expenses: Business costs remain the same regardless of business activity. This may include employee salaries or office rent.
• Variable expenses: Fluctuating business costs as a result of business production or sales. This may include manufacturing costs or commissions.
• Cash flow: Movement of money in and out of a company. Can include sales, business expenses, debt repayments, investments, etc.
• Business forecasting: The process of predicting financial performance for a business based on factors like historical data and market trends.

While fixed expenses can be easier to track, it can also be useful to leave room in the budget for unexpected variable expenses. Reviewing fixed expenses, previous variable expenses and overall cash flow can help financial stakeholders forecast for the future and begin building a realistic small business budget.

How to create a budget for small businesses

Budgeting may look different between businesses based on company size, funds and industry. Below, we cover a few steps that may help build a basic small business budget.

Review business operating costs

Before creating a formal budget, you may want to get an overall picture of operating costs. This includes both fixed expenses (like rent/salaries) and variable expenses (like inventory or travel costs).

Consider overestimating business costs, especially if your business is just starting out. This way, you can potentially avoid overspending on day-to-day expenses. Also keep in mind that budgets aren’t set in stone. You can always revise your budget after testing it out for a few months.

Estimate revenue

If you have enough business data, review revenue from previous months (or even years). It can be helpful for key finance stakeholders to review revenue monthly to keep tabs on any cash flow changes or potential issues.

Using business data can help businesses come up with realistic budgets based on previous evidence. This way, businesses can potentially avoid overestimating their revenue and running into financial hiccups later.

If you don’t have existing business data to reference, it may still be helpful to do some market research about the products and revenue of similar companies in your field.

Monitor cash flow

Consistent cash flow can be important for many reasons, including:

• Paying employee salaries on time
• Reimbursing employees for business expenses
• Paying invoices
• Investing in new business initiatives

Cash flow primarily consists of payments from customers and payments to vendors.

Keeping records of both invoices and receipts can help businesses monitor ingoing and outgoing cash. Keep in mind that you may run into issues regarding customers refusing to pay or making late payments. It can be useful to create late payment policies to get ahead of this. Additionally, allowing customers to make payments through multiple channels can provide additional flexibility.

Define business goals

If you have a new business, your goal might be to begin earning revenue. But if your business is a bit more established, you may have more specific goals about making a profit. In short, goals vary between businesses.

Creating specific goals prior to coming up with a budget can help financial stakeholders understand how to segment a budget. For example, if your business goal is to begin making a profit, you may want to cut back on non-essential spending for the time being.

Invest in accounting software

There are many different accounting software options out there that can help streamline the budgeting process. These programs can help with day-to-day bookkeeping, create expense reports, categorize business expenses and provide detailed financial insights based on previous business data.

However, it may not be necessary to invest in software for a business that doesn’t have many expenses or much cash flow. In these cases, it may be enough to track small business budgeting and accounting tasks in a basic spreadsheet.

Adjust the budget over time

Regularly reviewing your budget against your revenue and cash flow can help identify areas of improvement. Perhaps your business has a lot of variable expenses one quarter; you may need to adjust your overall budget to offset these costs.

You might also want to take note of any seasonal trends for your business and incorporate those into your budget. For example, you may choose to spend more on advertising leading up to the holiday season. Or, account for slow seasons in your industry where you know from previous years to expect less cash flow.

In summary

Keeping an up-to-date budget may help small businesses organize their finances and track their financial goals. It can also be useful to consider applying for a business credit card and bank account to better separate personal and business expenses.

Credit cards for businesses often provide ways to earn rewards on work-related purchases that can later be reinvested into the business. Explore our business credit card options to find out which may be the best option for your company.