Every business needs a solid business budget in place. A good budget will equip you with the insight you need to plan for the month or year ahead, make strong financial decisions, and increase your profits.
Whether you’re preparing to launch a brand new venture, or are already up and running, creating a budget for your business will help you set goals, get funding, and prevent you from overspending to improve your bottom line.
In this article, we’ll explain what a business budget is, why they are important, and how to create one.
In a nutshell: A business budget is a financial plan for your income and expenses. It helps businesses of all sizes stay on track, make informed decisions, and avoid overspending. Creating one involves estimating your revenue, listing your fixed and variable costs, and reviewing your profit or loss.
What is a business budget?
A business budget is a spending plan based on the income and expenses of your business. It combines key financial information to help you plan ahead and identify areas where you may need to cut costs, as well as growth opportunities.
Budgets provide an estimation of revenues and expenses over a specified period of time, such as monthly or annually. You may even want to create a budget for a specific event or project, to stress test different variables and aid decision-making.
A business budget will help you:
Forecast your earnings. Creating a budget helps you estimate the amount of money your business will make in revenue, sales and profit.
Plan your expenditure. A budget helps you predict spending so that you have a legitimate reason behind every penny you spend.
Set goals for your business. A business budget helps prioritise your goals and plans for growth.
Hold yourself accountable. Having a budget lets you evaluate your spending plan vs. spending reality to see if you’re meeting your desired goals and achieving forecasted expectations.
A business budget is an essential element of your strategic business plan, and vital for ensuring success. It will help you determine whether business costs are essential or optional, and help you keep your goals realistic.
If you’re hoping to get funding via business loans or raise venture capital, lenders and investors may require a detailed business plan that includes a budget so that they can get a clear picture of your forecasted spending, and feel confident that you have the financial health of your business in hand.
Top Tip: As well as a solid business budget, you should also have an up-to-date cash flow forecast, to ensure your business has enough money coming in at the right times to meet its financial obligations.
Why is budgeting important for a business?
Budgeting and small business success go hand in hand. Every professional business you’ve heard of uses a budget to plan ahead, control spending, and make smarter financial decisions.
A business budget can help you:
Stay in control of your income and expenses, so you always know where your money’s going
Avoid cash flow crises by spotting shortfalls early and planning for lean periods
Make better decisions about hiring, investing, and growth
Secure funding by showing lenders and investors that you’re financially responsible and prepared
Build resilience against unexpected costs, economic downturns, or slow seasons
Not having a budget could result in your business overspending, missing out on opportunities, or even running out of cash – no matter how profitable things may look on paper.
How to create a business budget for a small business
An effective business budget is detailed yet flexible. It should act as a living document that you re-evaluate and adjust often as your business grows and evolves.
Follow these steps to create a budget for your own business.
Top tip: We’re about to explain some basic accounting practices, and while business accounting is not something you need to master as a small business owner, it is key that you grasp the fundamentals. To learn more, read our complete guide to accounting for start ups.
1. Estimate your expenses
There are three types of expenses to account for in your budget:
Fixed costs are your regular, non-negotiable bills. They include things like rent, insurance, accounting fees, software subscriptions, and leased equipment. These are the basics your business can’t do without, and they tell you the minimum income you need to run your business.
Variable costs change depending on your business activity. Your cost of sales (or cost of goods sold) – such as materials, inventory, and labour – will likely be here, along with packaging, shipping, travel, and marketing. For example, if you’re making products, the more you produce, the more you’ll spend on raw materials and labour. Some costs, like employee wages, might be fixed or variable, depending on whether you hire seasonally or for specific projects.
One-off expenses are those unexpected or irregular costs, such as new equipment, repairs, moving offices, or even setting up your business. If you’re registering as a limited company, don’t forget to factor in incorporation fees.
You can use your past accounting data if you’ve been trading for a while, or research industry standards if you’re just starting out. You can register your limited company with Tide for just £14.99.
2. Estimate your income
Once you know what your expenses will be, you need to work out how much income your business will generate. This will tell you whether you can cover your expenses, or if you need to find areas where you can cut back on spending.
If your business is already up and running, you can use your historic sales activities to forecast future revenue. You may want to be conservative in your projections, to avoid being overconfident with your spending.
When you’re putting together a budget, particularly for a new business, market research can help you understand how competitors in your market price similar products or services. This can then help you estimate how much you could be bringing in once you launch your business.
Be sure to include any known fluctuations in income in your budget, such as seasonal highs and lows, or upcoming one-off projects. This will allow you to be realistic about how much you can spend, and whether you need to reserve capital from high-income periods to see you through quieter times.
3. Track your profit (or loss)
Your net profit margin shows how much you actually keep from your revenue after covering all your costs (eg operating expenses, interest, and taxes). Remember, revenue is what you earn before deducting expenses, so even high sales don’t guarantee profit.
You can use a net profit margin calculator to see how much you’re really making from your total revenue. To learn more, read our guide on net profit margins.
A profit and loss (P&L) statement helps you see whether your business is making or losing money over a specific period, and it’s simpler to put one together than it sounds. Once you’ve got your costs and revenue figures, it’s just a matter of adding and subtracting.
Using accounting software can save you time by eliminating the need to do this manually. With Tide Accounting, you can automate your bookkeeping, and view and customise your financial reports, including your profit and loss statement, right from the Tide app.
4. Set up an emergency fund
No matter how well you budget, emergencies will crop up from time to time, such as equipment breaking or bad weather impacting trade. Being prepared for the unexpected will help to keep your finances healthy, and relieve some of the stress that often comes with a crisis.
Good practice is to set aside 3-6 months’ worth of expenses. But you may want to save more than this depending on the types of unplanned expenses you may have to deal with.
An emergency fund should be kept separate from your day-to-day business finances, so you know exactly how much you have set aside should you need it. You can even earn interest on it with a dedicated business savings account.
5. Factor in any business loans
If you’ve taken out a business loan, or are planning to, make sure you include the repayments in your budget. Account for both the repayment amounts and any interest or fees, so you don’t get caught out by unexpected costs.
Before committing to a loan, compare your options to find the most suitable deal for your needs. You can use your budget to make sure the repayments are affordable.
Including loan repayments in your budget helps you stay on top of your cash flow. If you’re using the finance for growth, like buying new equipment or hiring staff, factor in how the loan will impact your cash flow and profitability in the long run.
6. Plan regular budget reviews
Building a budget isn’t a one-and-done task. You’ll need to revisit and update it regularly – particularly after any big or unexpected expenses. This will keep your finances in check and stop you from overspending.
When reviewing your business budget, there are two main areas you’ll need to pay attention to: revenue and expenses.
At the end of each month, compare your actual income to what you projected. If there’s a big gap (either a shortfall or a surprise windfall) ask yourself why. Were your targets unrealistic, or did something unexpected throw you off?
Similarly, you should review your actual expenses against your budgeted ones and try to identify where the costs differed from your budget plan.
As your business grows, you should use your budget to plan for your long-term needs, and make strategic cash flow decisions to account for things like seasonal revenue fluctuations, or planning for large expenses you expect to incur in the future.
Example of a small business budget
Here's a simple monthly example for a fictional coffee shop in the UK with £200,000 expected annual revenue.
Wrapping up
A well-planned business budget helps you forecast earnings, control spending, set realistic goals, and protect your business against unexpected challenges. Perhaps most importantly, it helps you make informed decisions that can steer your business towards success.
Here’s a reminder of the key points:
A business budget is a financial plan that estimates your income and expenses, helping you stay in control and avoid overspending
Budgeting allows you to forecast revenue, plan expenses, and set achievable goals for growth
Regularly reviewing and adjusting your budget keeps it relevant and effective as your business evolves
An emergency fund and accurate profit/loss tracking help keep your business resilient to future challenges
Ready to take control of your business finances? Tide’s business current account includes free, HMRC-recognised accounting software that automates your bookkeeping and provides real-time financial insights, helping you focus on growing your business. With built-in tools for tracking income and expenses, plus customisable financial reports like profit and loss statements, you’ll have everything you need to create, manage, and optimise your budget with ease.
