Budgeting for a Small Business, Step by Step

Start from what actually happened

Take the last twelve months of income and expenses from your books, grouped by a few sensible heads: sales by product or service, materials or direct cost, salaries, rent, utilities, marketing, transport, interest and others. If your records are in bad shape, tidy them first, since a budget built on unreliable history will mislead you.

Note anything unusual: a one-time sale, a repair, a customer who left. Mark these separately so that you do not repeat them blindly in the new plan.

Set your revenue assumptions in plain words

Revenue is the most uncertain line, so write the assumptions behind it. For example: 'repeat customers buy about the same as last year, plus two new customers a month at an average order of a stated value'. Use your own history, not hopes.

Consider building three versions: a cautious case, an expected case and an ambitious case. You will plan spending against the cautious case and treat the rest as a bonus, which protects you if sales are slower than expected.

Separate fixed costs from costs that move with sales

Fixed costs, such as rent and core salaries, continue whether you sell much or little. Variable costs, such as materials, commissions and packing, rise and fall with volume. This split tells you how much of each extra sale actually reaches the bottom line.

Budget each fixed cost line by line, using contracts and known increases. Budget variable costs as a proportion of sales, based on last year's pattern, adjusted for supplier price changes you already know about.

• Fixed: rent, core staff, insurance, software subscriptions
• Variable: materials, packing, freight, sales commission
• Semi-variable: utilities, overtime, repairs

Add the timing of cash

Profit and cash are different things. A sale made in March may be paid in May, while salaries are due every month. Convert your budget into a month-by-month cash view that reflects when customers will really pay and when suppliers, staff and others must be paid.

This view often shows a tight month that the annual numbers hide. Spotting it early lets you talk to suppliers, adjust the timing of purchases or arrange funding, with advice from your bank or a qualified adviser, before it becomes an emergency.

Include the plans that need money

List the investments you intend to make: equipment, a hire, a new branch, a marketing push. Estimate the cost and when it will fall, and write down what you expect in return and by when. If the budget cannot carry all of them, rank them and delay the lowest.

Leave a small allowance for the unexpected. It does not need to be large, but a budget with zero slack is already wrong on the day it is written.

Review every month and adjust

Each month, compare actual figures with the budget, line by line. Ask why for the largest differences, whether the cause is a one-off or a trend, and what you will do about it. Update the forecast for the rest of the year when the facts change.

Keep the review short: one page, one meeting, with the people who own the cost lines. A budget that is reviewed gets used, and one that is filed does not.