finance budget for business plan

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How to Create a Business Budget for Your Small Business

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A business budget estimates future revenue and expenses in detail, so that you can see whether you’re on track to meet financial expectations for the month, quarter or year. Think of your budget as a point of comparison — you run your actual numbers against it to determine if you’re over or under budget.

From there, you can make informed business decisions and pivot accordingly. For example, maybe you find that your expenses are over budget for the quarter, so you may hold off on a large equipment purchase.

Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.

» MORE: What is accounting? Definition and basics, explained

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How does a business budget work?

Budgeting uses past months’ numbers to help you make financially conservative projections for the future and wiser business decisions for the present. If you’ve had a few bad months and predict another slow one, you can prepare to minimize expenses where possible. If business has been booming and you’re bringing in new customers, maybe you invest in buying more inventory to satisfy increased demand.

Creating a business budget from scratch can feel tedious, but you might already have access to tools that can help simplify the process. Your small-business accounting software is a good place to start, since it houses your business’s financial data and may offer basic budgeting reports.

To create a budget in QuickBooks Online , for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.

You can then compare actual versus projected figures side by side by running a Budget vs. Actuals report. Businesses that need more in-depth features, like cash flow forecasting or the ability to use different projection methods, might subscribe to business budgeting software in addition to accounting software.

If your small business doesn’t have access to these features or has simple financials, you can download free small-business budget templates to manually create and track your budget. Regardless of which option you choose, your business will likely benefit from hiring an accountant to help manage your budget, course-correct when the business gets off track, and make sure taxes are being paid correctly.

Why is a business budget important?

A business budget encourages you to look beyond next week and next month to next year, or even the next five years.

Creating a budget can help your business do the following:

Maximize efficiency. 

Establish a financial plan that helps your business reach its goals. 

Point out leftover funds that you can reinvest.

Predict slow months and keep you out of debt.

Estimate what it will take to become profitable.

Provide a window into the future so you can prepare accordingly.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.

How to create a business budget in 6 steps

The longer you’ve been in business, the more data you’ll have to inform your forward-looking budget. If you run a startup , however, you’ll want to do extensive research into typical costs for businesses in your industry, so that you have working estimates for revenue and expenses.

From there, here’s how to put together your business budget:

1. Examine your revenue

One of the first steps in any budgeting exercise is to look at your existing business and find all of your revenue sources. Add all those income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months and preferably for at least the previous 12 months, provided you have that much data available.

Notice how your business’s monthly income changes over time and try to look for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.

Then, you can use those historic numbers and trends to make revenue projections for future months. Make sure to calculate for revenue, not profit. Your revenue is the money generated by sales before expenses are deducted. Profit is what remains after expenses are deducted.

2. Subtract fixed costs

The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They might occur daily, weekly, monthly or yearly, so make sure to get as much data as you can.

Examples of fixed costs within your business might include:

Debt repayment.

Employee salaries.

Depreciation of assets.

Property taxes.

Insurance .

Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the next step.

3. Subtract variable expenses

As you compile your fixed costs, you might notice other expenses that aren’t as consistent. Unlike fixed costs, variable expenses change alongside your business’s output or production. Look at how they’ve fluctuated over time in your business, and use that information to estimate future variable costs. These expenses get subtracted from your income, too.

Some examples of variable expenses are:

Hourly employee wages.

Owner’s salary (if it fluctuates with profit). 

Raw materials.

Utility costs that change depending on business activity.

During lean months, you’ll probably want to lower your business’s variable expenses. During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.

4. Set aside a contingency fund for unexpected costs

When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.

Although you might be tempted to spend surplus income on variable expenses, it’s smart to establish an emergency fund instead, if possible. That way, you’ll be ready when equipment breaks down and needs replacing, or if you have to quickly replace inventory that's damaged unexpectedly.

5. Determine your profit

Add up all of your projected revenue and expenses for each month. Then, subtract expenses from revenue. You may also see the resulting number referred to as net income . If you end up with a positive number, you can expect to make a profit. If not, that’s a loss — and that can be OK, too. Small businesses aren’t necessarily profitable every month, let alone every year. This is especially true when your business is just starting out. Compare your projected profits to past profits to confirm whether they’re realistic.

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6. Finalize your business budget

Are the resulting profits enough to work with, or is your business overspending? This is your opportunity to set spending and earning goals for each month, quarter and year. These goals should be realistic and achievable. If they don’t line up with your projections, make sure to establish a strategy for making up the difference.

As time goes on, regularly compare your actual numbers to your budget to determine whether your business is meeting those goals, and course correct if necessary.

» MORE: Ways your small business can spend smarter

A business budget projects future revenue and expenses so you can create a smart, realistic spending plan. As the year progresses, comparing your actual numbers against your budget can help you hold your business accountable and make sure it reaches its financial goals.

A business budget includes projected revenue, fixed costs, variable costs and the resulting profits. You can also factor in contingency funds for unforeseen circumstances like equipment failure.

On a similar note...

How to Write a Financial Plan for a Business Plan

Noah Parsons

4 min. read

Updated July 11, 2024

Creating a financial plan for a business plan is often the most intimidating part for small business owners.

It’s also one of the most vital. Businesses with well-structured and accurate financial statements are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully create your budget and forecasts.

Here is everything you need to include in your business plan’s financial plan, along with optional performance metrics, funding specifics, mistakes to avoid , and free templates.

• Key components of a financial plan in business plans

A sound financial plan for a business plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, you’ll need to include a few additional pieces of information as part of your business plan’s financial plan example.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

• Financial ratios and metrics

With your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios.

While including these metrics in your financial plan for a business plan is entirely optional, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Key financial terms you should know

It’s not hard. Anybody who can run a business can understand these key financial terms. And every business owner and entrepreneur should know them.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

• How to improve your financial plan

Your financial statements are the core part of your business plan’s financial plan that you’ll revisit most often. Instead of worrying about getting it perfect the first time, check out the following resources to learn how to improve your projections over time.

Common mistakes with business forecasts

I was glad to be asked about common mistakes with startup financial projections. I read about 100 business plans per year, and I have this list of mistakes.

How to improve your financial projections

Learn how to improve your business financial projections by following these five basic guidelines.

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Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

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How to create a business budget: 8 simple steps.

No matter the size of your business, a business budget is vital to planning and guiding your business’s growth. By understanding the fixed expenses of a company and accounting for the ebb and flow of work, a proper business budget can help your business maintain itself through the year and create protection around unplanned expenses through well allocated funds. In this guide, we'll walk you through the process of creating a business budget, outlining essential steps to help you manage your finances effectively.

What Is a Business Budget?

A business budget is a financial plan outlining projected revenues and expenses for a business during a specific period of time (most typically a year, though there are often monthly or quarterly reexaminations). Although there are variables throughout the year, a complete and accurate budget will serve as a blueprint for businesses in managing income and expenditures, guiding decision-making processes, and ensuring financial stability. 

What Should a Business Budget Include?

A comprehensive business budget’s purpose is to provide a business a holistic view of their financial health. When looking through bank statements, take note of those expenses that reoccur throughout the year and note those—as well as those unexpected expenses your company should instead anticipate. Key components to include are:

• Revenue Forecast: Anticipated income from sales, services, or other sources after deducting costs, taxes, and other fees.
• Fixed Operating Expenses: Costs associated with running the business, such as rent, utilities, salaries, and supplies.
• Capital Expenditures: Investments in assets like equipment, machinery, or property.
• Debt Service: Payments towards loans, credit lines, or other forms of debt.
• Taxes: Estimated tax liabilities, including income tax, sales tax, and payroll taxes.
• Contingency Funds: Reserves set aside for unexpected expenses or emergencies.
• Profit Targets: Desired levels of profitability, indicating the financial performance you aim to achieve.

Why Is Budgeting Important to a Business?

Budgeting plays a crucial role in the financial management of a business for several reasons:

• Resource Allocation: Helps allocate resources efficiently to prioritize essential activities and investments.
• Financial Control: Provides a framework for monitoring and controlling expenses to prevent overspending.
• Performance Evaluation: Facilitates performance measurement against predetermined targets, enabling timely corrective actions.
• Decision Making: Guides decision-making processes by providing insights into the financial implications of various options.
• Risk Management: Identifies potential risks and allows for proactive mitigation strategies to safeguard financial stability.

How Does Budgeting Help a Business?

Effective budgeting contributes to the success and sustainability of a business in numerous ways:

• Improved Cash Flow Management: Helps maintain adequate cash reserves to meet financial obligations and fund growth initiatives.
• Enhanced Profitability: Enables businesses to identify opportunities for revenue growth and cost optimization, leading to higher profitability.
• Better Resource Utilization: Ensures optimal utilization of resources by aligning expenditures with strategic priorities and operational needs.
• Increased Financial Transparency: Provides stakeholders with a clear understanding of the company's financial health and performance.
• Long-term Planning: Facilitates long-term planning by forecasting future financial requirements and setting achievable goals.

How to Create a Business Budget

Now that we’ve gone over the importance of a business budget, it’s time to understand the steps you need to take in order to create a comprehensive plan.

Gather Financial Information

Start by compiling relevant financial data, including past income statements, balance sheets, and cash flow statements. Analyze historical trends to identify patterns and make informed projections for the upcoming period.

Determine Your Financial Goals

Define clear, measurable financial goals aligned with your business objectives. Whether it's increasing revenue, reducing costs, or improving profitability, setting specific targets will provide a roadmap for your budgeting process.

Identify Revenue Sources

Identify all potential sources of revenue, including sales, services, investments, and other income streams. Estimate the expected revenue for each source based on market trends, historical data, and sales forecasts.

Estimate Expenses

Next, list all anticipated expenses, categorizing them into fixed and variable costs. Fixed expenses, such as rent and salaries, remain constant regardless of business activity, while variable expenses, like supplies and utilities, fluctuate based on demand.

Factor in Contingencies & Emergency Funds

Allocate a portion of your budget for contingencies and emergency funds to cover unforeseen expenses or revenue shortfalls. Building a financial cushion will provide stability and resilience during challenging times.

Balance Your Budget

Balance your budget by ensuring that projected revenues exceed estimated expenses. If there's a deficit, identify areas where you can reduce costs or increase revenue to achieve equilibrium.

Monitor & Track Your Budget

Regularly monitor and track your budget against actual financial performance to identify variances and deviations. Use accounting software or spreadsheets to update your budget and make adjustments as needed to stay on course.

Review & Adjust Budget Regularly

Review your budget periodically, ideally on a quarterly or annual basis, to assess its effectiveness and relevance. Adjust your budget as necessary based on changing market conditions, business priorities, and performance trends.

Contact Mowery & Schoenfeld for Help with Business Budgeting

Creating and managing a business budget requires expertise and strategic planning. At Mowery & Schoenfeld, we specialize in helping businesses develop robust financial strategies to achieve their financial goals. Contact us today to learn how our team of experienced professionals can assist you with business budgeting and financial management. 

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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Key takeaways

• A business budget is a financial plan that helps estimate a company's revenue and expenses, making it an essential tool for small businesses
• The steps to creating a business budget include choosing budget and accounting software, listing expenses and forecasting revenue
• If a business finds itself in a budget deficit, strategies such as cutting costs, negotiating with suppliers and diversifying revenue streams can help

As a small business owner, keeping your finances organized through a business budget is crucial to running a successful company.

Business budgeting involves creating a financial plan that estimates future revenue and expenses to make informed financial decisions, which can ultimately move the needle on your business’s financial goals and help it grow in profitability.

What is a business budget?

A business budget is a financial plan that outlines the company’s current revenue and expenses. The budget also forecasts expected revenue that can be used for future business activities, such as purchasing equipment. It sets targets for your business’s revenue, expenses and profit and helps you determine if you’ll have more money coming in than you pay out.

A business budget is an essential tool that helps you make wise business decisions. Without it, it’s difficult to gauge your business’s financial health.

What is the difference between a cash flow statement and a business budget?

A cash flow statement  (CFS) is a financial document that summarizes the movement of cash coming in and going out of a company. The CFS gauges how effectively a company manages its finances, including how it manages debt responsibilities and funds day-to-day operations.

It’s similar to a business budget in that you can see expenses and revenue. But while a budget gives a moment-in-time snapshot of your business’s financial performance compared to forecasts, the cash flow statement focuses on the actual inflows and outflows of money through your business.

Follow these steps to ensure a well-developed budget, from understanding your expenses to generating revenue and adjusting expenses to balance the budget.

1. Choose a budget and accounting software

First, you’ll want to store your expense and revenue information with accounting software to help you track your numbers and generate reports. Some software may also help you assign categories to the transactions, identify tax deductions and file taxes. Quickbooks is an example of accounting software.

Some business bank accounts also have accounting software built in, helping you stay organized by keeping your accounting and banking in one place.

2. List your business expenses

The next step in creating a small business budget is to list all your business expenses. Here are the types of expenses you want to include in your budget:

• Fixed expenses: Fixed expenses cost a fixed amount monthly or within the assessed period. Those costs include rent, insurance, salaries and loan payments.
• Variable expenses: Variable expenses can change monthly or over time, making them trickier to budget. This might include materials, direct labor, utility bills or marketing expenses.
• Annual or one-time costs: Some costs only occur a few times per year, while others you’ll only pay for as needed, such as buying new equipment. You still want to budget for these expenses by allocating a portion of your weekly or monthly budget toward one-time expenses.
• Contingency funds: Unexpected business costs can throw a wrench in your budget if not planned for. Such costs could include emergency repairs, necessary equipment purchases, sudden tax increases or unforeseen legal fees. To plan for these costs, you can create a contingency or emergency fund that’s separate from your operational budget.
• Maintenance costs: To allocate funds for maintenance costs, begin by including regular inspections and maintenance in your budget. Then, make sure to leave room for changes and unexpected maintenance costs.

3. Forecast your revenue

To estimate your future revenue, start by deciding on a timeline for your forecast. A good place to start is the previous 12 months. Your accounting software may also include revenue forecasting as one of its features, which can automate this step for you.

The timeline and your recent past growth can help you understand how much revenue you’ll generate in the future. Consider external factors that could drive revenue growth, such as planned business activities like expansion, marketing campaigns or new product launches.

You’ll also want to think about anything that might slow your growth. Many businesses experience seasonal fluctuations, which can impact your budget if you don’t plan for it. To account for these changes, list the minimum expenses required to keep your business running. Use your financial statements to understand these costs, and consider averaging out irregular expenses over the year to avoid surprises.

Ideally, your business should build a cash reserve during profitable periods to cover expenses during slower seasons. If necessary, consider various financing options, such as a business credit card or line of credit, that you can draw from to manage cash flow during peak or off times. Lightbulb Bankrate insight If you use debt financing to cover an expense, make sure that you can manage the debt in your regular business budget. Avoid going into debt when you don’t have a clear plan to pay it off or when you’re uncertain about your business’s profitability.

4. Calculate your profits

The next step in creating a business budget is to calculate your business profits. You can look at your total profits by calculating revenue minus expenses. That way, you see how much money you have to work with, called your working capital .

You should also understand your profit margins for each of your products and services, which can help you set prices or decide whether to offer a new product or service.

How to calculate your profit margins

To find out your gross profit margin, you’ll first need to calculate the gross profit. To calculate your business’s gross profit, subtract the cost of goods sold (COGS) from your total revenue. COGS includes all the expenses related to producing your products and services.

Once you have the gross profit, use the gross profit margin formula: (Revenue – COGS) / Revenue x 100. This will give you a percentage that shows how much profit you gain from that particular product after accounting for the product’s costs. Calculator Bankrate insight If your total product revenue is $50 and the total production costs are $35, your gross profit would be $15. To find the gross profit margin, you’d do the following calculation: ($50-$35) / $50 x 100 = 30%. The gross profit margin in this example is 30 percent.

5. Make a strategy for your working capital

Knowing what to do with extra revenue, which is your working capital, is crucial for managing your business finances and growth. Here’s how to get started with a financial strategy that propels your business goals forward:

• Set spending limits for different categories in your budget. When listing your expenses, you should have set a dollar amount for each category. You can estimate this by a monthly average or a general forecasted amount.
• Set realistic short- and long-term goals. These goals will motivate you to stick to your budget and guide your spending decisions.
• Compare your actual spending with your net income and priorities. Look at the areas you’re spending and consider whether you need to reallocate money to different categories. Consider separating expenses into business needs and extras.
• Adjust your budget and actual spending. Adjust your spending to ensure you do not overspend and can allocate money towards your goals. If you need to cut spending, consider the categories that are extras, such as types of marketing that you don’t know will generate a return on investment.

6. Review your budget and forecasts regularly

Finally, review your budget regularly. By frequently checking in on your budget, you can identify any discrepancies between your planned and actual expenses and adjust accordingly. This allows you to proactively handle any financial issues that may arise rather than reacting to them after they’ve become a problem.

Regular reviews also allow you to refine your budgeting process and improve its accuracy over time. Keep in mind that your budget is not set in stone but rather a tool to guide your financial decisions and help you achieve your business goals. Lightbulb Bankrate insight As you create your business budget and make business decisions, you can write or adjust your business plan to match your evolving priorities. The business plan outlines your business goals and the steps and strategies you’ll take to achieve them.

What to do if you have a deficit in your business budget

Finding a deficit in your small business budget can be alarming, but there are several strategies you can employ to handle this situation.

• Do a cash flow analysis. Begin by doing a cash flow analysis to review what your business is earning and spending money on. Identify potential problems and adjust the budget as needed to prevent overspending.
• Cut nonessential business costs. Cutting spending may involve eliminating nonessential costs and transferring funds from other categories to overspent categories. Your goal is a balanced or profitable budget.
• Negotiate with suppliers. Be transparent in your communications with suppliers and explain your quality standards and why you’re seeking cost reduction. Explore options for cost reduction that do not compromise quality, such as process improvements or ordering in larger quantities.
• Create a lean business model. By removing anything that doesn’t benefit your customer, your business can potentially save time and resources. Lean business models focus on continually improving processes and customer experience without adding additional resources, time or funds.
• Add revenue and diversify revenue streams. Raising revenue requires a realistic plan with measurable goals to increase sales and overall business income. You can also consider other products and services you could offer that would make your business profitable.
• Use financing to cover temporary gaps. Applying for a small business loan can help pay bills during an unplanned shortfall. Since this will add an expense to your budget, make sure you can handle the loan repayments and your regular expenses.
• Plan for a deficit. In some cases, a planned budget deficit might be a strategic decision, such as investing in new opportunities that promise long-term benefits.

Bottom line

Having a well-developed business budget is crucial for making informed decisions. You can effectively manage your small business’s finances by tracking and analyzing your business’s inflows and outflows, forecasting your expected revenue and adjusting your budget to stay balanced.

Even in the face of a budget deficit, there are various strategies you can use to keep your business profitable, including negotiating costs with your suppliers, assessing your business operations and offering new products and services.

With a solid business budget in place, you can confidently navigate financial challenges and drive long-term success for your small business.

Frequently asked questions

What are the benefits of a business budget, what are the components of a business budget, how do you calculate fixed and variable costs in a business budget.

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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Julia is a writer in New York and started covering tech and business during the pandemic. She also covers books and the publishing industry.

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How to Create a Business Budget for Your Small Business

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Our Small Business Expert

If you’ve just started your business, chances are that you have yet to create a budget. But it’s difficult to grow your business, meet any short- or long-term goals, or obtain outside investors or financing without accurate financial projections, which requires a small business budget.

Creating a budget also plays an important role in the the accounting cycle, which ensures that all financial transactions are properly accounted for.

And while the act of creating a budget may seem daunting, it’s much like creating a personal budget. You identify what you own of value (your assets), estimate your upcoming expenses, and account for and grow your revenue base.

If you know how to create an expense report or how to write an invoice, and are comfortable with the basics of bookkeeping, you can certainly handle business budget planning.

By creating, and more importantly, following a budget, you can eliminate wasteful spending, develop plans to expand your revenue base, and work toward your set goals in a productive fashion.

5 types of budgets for businesses

Budgets help businesses track and manage their resources. Businesses use a variety of budgets to measure their spending and develop effective strategies for maximizing their assets and revenues. The following types of budgets are commonly used by businesses:

1. Master budget

A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health. The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate their overall performance, as well as that of individual cost centers within the organization.

Master budgets are often used in larger companies to keep all individual managers aligned.

2. Operating budget

An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period.

To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these reports month after month to see if a company is overspending on supplies.

3. Cash flow budget

A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it's managing its cash wisely.

Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future.

A construction company, for example, might use its cash flow budget to determine whether it can start a new building project before getting paid for the work it has in progress.

4. Financial budget

A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its spending relative to revenues from core operations.

A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.

5. Static budget

A static budget, unlike a flexible budget, is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.

How to make a budget for your small business

One of the easiest and most accurate ways to create a budget is to review your revenue and costs for the past year and use those numbers when creating your new budget.

If your business is brand new, you’ll have to be a bit more creative, relying on obtaining numbers from the last few months, or researching similar businesses to obtain accurate estimates on revenue and expenses.

However you do it, learning budgeting for business is a lot easier than you imagine.

Step 1: Review your revenue

The first step toward creating a budget is to examine your revenue: not just the total for any given time, but specifics, such as months when revenue rose or dipped. This is particularly important for managing cash flow.

For instance, many retailers earn a large part of their yearly revenue in the months of November and December, while January and February typically are very slow in sales.

Knowing this information and including it in your budget can help you be better prepared for both the busy and the slow months.

Step 2: Take a look at your fixed expenses

As a small business owner, you should know what your regular monthly expenses are. If you know how to track business expenses such as rent, insurance, salaries, and utilities, you can create a budget.

Factoring these items into your budget helps to ensure that you’re accounting for these expenses properly.

Step 3: Factor in variable expenses

Whether in our personal lives or in business, we need to factor in variable expenses.

For instance, you may need to hire a temp if your office manager becomes unexpectedly ill. Other variable costs can include advertising and marketing, as well as postage or printing costs. Travel is another cost that may be planned (you know you’re going to a convention in May), but the final cost is not yet known.

Factoring in variable expenses can help with your bottom line. Don’t be conservative in estimating these costs, You’d rather they be too high, leaving you more money than expected for the month than the opposite.

Step 4: Include one-time and unexpected costs

While it may seem counterintuitive to include unexpected costs into your budget when they haven’t even occurred yet, you can safely assume that something unexpected will happen.

Your computer crashes and needs to be repaired, or worse, replaced. Or maybe your company car dies. These are both examples of unexpected costs. You can also plan for one-time costs.

For instance, you know you’ll be upgrading employee laptops in December. This allows you to plan for this expense in advance, ensuring that the funds should be available.

Step 5: Put all your information into a budget format

The ideal situation is to prepare your budget details in your accounting software application.

However, not all accounting software, particularly those designed for small businesses, include a budgeting feature. In that case, you can use Microsoft Excel or similar spreadsheet software to prepare your budget.

This Microsoft Excel spreadsheet can be used to create your business budget. Image source: Author

One of the main advantages of preparing a budget in your accounting software application is that you can track budget versus actual revenue and expenses. This lets you see how accurate (or not) your budget is, allowing you to perhaps make some mid-year adjustments.

Things to consider when making a budget for your business

Creating a budget is a great first step toward managing your business properly. However, it’s important when creating your budget that you do your best to make it as accurate as possible. There are numerous ways to do that, including the following:

1. Be conservative with revenue

When entering revenue totals, be conservative. At the beginning of the year, we're all optimistic. But be sure when you budget your revenue, you enter numbers that are as accurate as possible.

When planning for revenue growth, be conservative as well, perhaps budgeting for a 5%-10% growth for the year. If you exceed that level, great. You’ll have money to spare. But if you don’t, you’ll end up with a loss, which is not where you want your business to be.

2. Plan for growth

Planning for growth is important when calculating budget revenue, but you’ll have to account for added expenses as well.

Yes, if your business grows, your revenue will increase, but so will your overhead, as you increase advertising, add employees, and pay additional taxes. So when planning for business growth, be sure to factor in your increased expenses as well.

3. Unexpected expenses

This is an important one. One catastrophe can be disastrous for your business, particularly if you operate on limited cash flow.

When budgeting, just assume that your business will have at least one major unexpected expense during the year. If it doesn’t, great. You can bank that money for when the unexpected does occur.

4. Long-term goals

Before completing your budget, you might want to consider your long-term goals.

Do you plan on increasing your customer base each year by 5%? Perhaps you’re working out of your home, but plan on renting or buying a building for your business in the next year or two.

Be sure to factor that into your budget, and plan your income and expenses accordingly.

The best accounting software for tracking your small business budget

Not every accounting software application offers budgeting capability, but the following small business accounting software applications do.

If you’re looking to make the move to accounting software, or are looking for an application that allows you to create and manage a budget for your business, be sure and check out these applications.

Xero lets you easily create a budget using their Budget Manager feature. You can choose your start date for any budget, and prepare a budget of 3, 6, 12, or 24 months. Xero also allows you to compare any created budget to actual totals, to see how far under or over budget your company is.

The Budget Manager lets you choose start date, actuals, and period of time for each budget. Image source: Author

You can copy budget details from actuals for the prior year, copy data from an existing budget, or create a new budget from scratch. Adjustments can be made for each budget period, so you can adjust the amount each month to increase budgeted totals by a set amount or by percentage. This is a great way to budget for growth.

2. QuickBooks Online

The budgeting feature in QuickBooks Online lets you create a yearly budget easily. Just choose the correct fiscal year, click on the “Add Budget” button, and start entering budget details.

You can choose to pre-fill budget data using actual QuickBooks Online data or just create a budget from scratch. You have the option to create a monthly, quarterly, or yearly budget, and can choose to subdivide your budget by customer, class, or location, or just enter a single total into the appropriate fields.

The Budget Preview feature lets you preview your newly created budget for accuracy. Image source: Author

Budget data can be edited when desired, and to get a sense of your business performance, run the Budget vs. Actuals report, which displays current company performance to date.

3. Zoho Books

Zoho Books offers excellent budget creation capability, offering three ways to enter budget data:

• Auto-fill budget information based on current income and expense accounts
• Pre-fill from last year’s actual numbers
• Start from scratch, entering budget numbers manually

Like Xero, Zoho Books lets you enter budget numbers for a single period, then specify a percentage increase or decrease in budgeted numbers.

For instance, if your short-term plan for this year is to increase your revenue by 5% each quarter, you can enter that information in Zoho Books, and it will automatically calculate the 5% increase and auto-fill the rest of the budget. You can also apply a fixed amount for each period.

Zoho Books offers a comprehensive budget management feature with multiple entry options. Image source: Author

At the end of the specified budget period, you can compare actuals against your budgeted amounts to view business performance and make any adjustments going forward.

Get started on your budget today

Now that you know how easy it is to prepare a budget for your small business, what are you waiting for?

Completing a budget for your business will provide you with the information you need to grow your business, plan for the unexpected, and stay on track for the future.

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How to create a budget for your business

July 10, 2024 | 7 minute read

If you want to increase the odds of having a successful small business, start by creating a budget. A budget is a powerful tool. It helps you understand how much money you have and what you’ve spent where — and provides clues about how much money you’ll need in the short and long term. It can also help shape key business decisions like whether to add staff and equipment or where to cut expenses to avoid cash flow issues .

A budget is critical, particularly at a time when companies are coping with rising costs. Seventy-three percent of small business owners polled for the  2024 Bank of America Business Owner Report , conducted in partnership with Bank of America Institute, said they are concerned about inflation and 61% said they are worried about commodities prices. Here’s how to create a budget and use it to make the best decisions today, tomorrow and in the future.

What is a business budget?

Simply put, a budget is a spending plan based on your business’ income and expenses. It shows your available capital, estimates spending and assists in predicting revenue. The information in your budget can help you plan your company’s next moves. A budget looks at activities for a specified time. Think of it as a tool to help you allocate resources toward the strategic priorities in your business plan.

What are the benefits of creating a business budget?

Budgeting enables you to allocate financial resources more effectively, track variances and make changes to your spending plan as needed. A budget provides a much-needed assist in maintaining daily operations, giving you the intel to deploy your cash more strategically so you don’t face a cash flow crunch. It can identify when you need to raise financing. Debt is a fact of life in many businesses. A budget can help you manage debts with controlled and planned financial activities.

A budget can also help you stay ready for the unexpected. Staying within your budget and creating a safety net for emergencies will give you a firmer financial foundation.

Types of business budgets

When it comes to business budgets, it’s not one and done. There are several types that may be helpful in your business.

Master budget

This type of budget uses inputs from financial statements, your cash forecast and your financial plan to create a single document you can use to keep your finger on the pulse of your business. Your management team can use it to plan the activities needed to reach business goals. Typically, small businesses use spreadsheets to create their master budgets or consider using budgeting software too, as it may help minimize mistakes.

Operating budget

This budget shows your projected revenue and expenses for a given period. Think of it as a profit and loss report , but for the future. The operating budget includes fixed and variable costs, as well as non-operating expenses. Capital expenditures are usually excluded from an operating budget. Each line item should be backed up with key details.

Fixed costs occur monthly.

Variable costs, like utilities , change depending on factors like usage.

Capital costs are one-time expenses, such as the purchase of a building.

The operating budget gives you a reality check on whether you’re spending according to plan. While this budget is often prepared at the start of each year, don’t set it and forget it. Update it throughout the year, be it monthly or quarterly, so you always know where your business stands.

Capital budget

Companies sometimes create a capital budget when they are looking to make a large purchase, such as a large piece of factory equipment or a new technology system that will require a substantial investment. This allows the finance team to determine the impact on cash flow and plan accordingly.

Cash budget or cash flow budget

This document will give you an estimate of how money comes in and goes out during a certain time horizon. You create a cash budget using the conclusions you draw from sales forecasts and production, and by estimating payables and receivables.

Labor budget

If you will hire employees , this type of budget is helpful in planning for the money you’ll need to meet payroll, not only for regular employees, but also for any temporary and seasonal staff.

Budgeting methods you can use

There’s more than one way to budget. Here are some common methods:

An incremental budget

This takes the current period’s budget or actual performance, uses it as a base and then adjusts it in incremental amounts to account for any increases in costs. Typically, when you put together an incremental budget, you use the rate of inflation as a guide for fine-tuning the amounts. One plus of budgeting this way is that it is relatively easy to do.

Zero-based budgeting

Here, you’re budgeting from scratch. You must scrutinize every expense or potential expense before deciding to add it to your budget. This helps you align your business goals with your expenses. Unlike other types of budgeting, it doesn’t focus on historical results. A zero-based budget is ideal when you’re looking to reduce expenses.

Activity-based budgeting

Actions speak louder than words. This type of budgeting looks at the inputs required to reach the targets or outputs set by the company. Say your business wants to achieve $5 million in revenue. First, you need to figure out the activities that need to happen to make that revenue a reality and then determine the costs of carrying out those activities.

Participative budgeting

There are more cooks in the kitchen with participative budgeting, which is often used by larger small businesses. Both middle management and lower levels of management share in the responsibility of putting together the budget. The budget begins with lower management then moves to middle managers before top management weighs in and signs off. An upside of this type of budgeting is that information is shared, and when management and staff are on the same page in terms of goals, they’re more likely to achieve those goals.

How to create a business budget

Creating a business budget takes several steps:

• Calculate your revenue . Include all your revenue streams, preferably over at least the last 12 months, to determine your monthly income. If your business is new, you can research what’s typical in your industry and use that as a guide to come up with estimates.
• Add up your fixed costs . Fixed costs are things like rent, payroll and debt repayment.
• Determine variable costs . In addition to utilities, these may include billable labor, materials, transaction fees and commissions.

Using a budget to make better decisions

If you make your budget a regular resource, you’ll be rewarded for your budgeting efforts. As you make spending decisions, consult your budget frequently and use it as a reality check. If you have budgeted for X amount and go beyond it, you’ll have some explaining to do, even if you’re only answering to yourself. Being disciplined can be challenging, but ultimately it will position your business for growth , both today and in the future.

Explore more

How to create a sales forecast

Understanding free cash flow

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6 Steps to a Better Business Budget

A top-notch budget can help propel your business success

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

You've just purchased or opened a small business and you know your trade. But when it comes to bookkeeping—and more specifically, budgeting —your skill set is lacking. The good news is that it is possible to come up with a budget (or at least a good estimation of what will be needed in terms of dollars and cents) fairly easily.

Estimating and matching expenses to revenue (real or anticipated) is important because it helps small business owners to determine whether they have enough money to fund operations, expand the business, and generate income for themselves. Without a budget or a plan, a business runs the risk of spending more money than it is taking in, or conversely, not spending enough money to grow the business and compete.

Key Takeaways

• A business budget helps owners determine if they have enough money to fund operations, expand, and generate income.
• Without a budget, a company runs the risk of spending money it doesn't have, not spending enough to compete, or failing to build a solid emergency fund.
• To create a budget, check industry standards to determine the average costs of doing business and create a spreadsheet estimating the amount of money you'll need to allocate toward your costs.
• Factor in some slack in your budget to cover unexpected costs and review areas where you could cut costs if times get tough.
• Review your budget every few months and shop around for new suppliers to save money on products or services for your business.

Getting Started With a Business Budget

Every small business owner tends to have a slightly different process, situation, or way of budgeting. However, there are some parameters found in nearly every budget that you can employ.

For example, many business owners must make rent or mortgage payments. They also have utility bills, payroll expenses, cost of goods sold (COGS) expenses (raw materials), interest, and tax payments. The point is every business owner should consider these items and any other costs specifically associated with the business when setting up shop or taking over an existing business.

With a business that is already up and running, you can make assumptions about future revenue based on recent trends in the business. If the business is a startup , you'll have to make assumptions based on your geographic area, hours of operation, and by researching other local businesses. Small business owners can often get a sense of what to expect by visiting other businesses that are for sale and asking questions about weekly revenue and traffic patterns.

After you've researched this information, you should then match the business's revenue with expenses. The goal is to figure out what an average weekly expense for overhead, utilities, labor, raw materials, etc. would look like. Based on this information, you may then be able to estimate or forecast whether you'll have enough extra money to expand the business or to tuck away some money into savings. On the flip side, owners may realize that in order to have three employees instead of two, the business will have to generate more in revenue each week.

These six simple tips will help you put together a top-notch small business budget:

1. Check Industry Standards

Not all businesses are alike, but there are similarities. Therefore, do some homework and peruse the internet for information about the industry , speak with local business owners, stop into the local library, and check the Internal Revenue Service (IRS) website to get an idea of what percentage of the revenue coming in will likely be allocated toward cost groupings.

Small businesses can be extremely volatile as they are more susceptible to industry downturns than larger, more diversified competitors. So, you only need to look for an average here, not specifics.

2. Make a Spreadsheet

Prior to buying or opening a business, construct a spreadsheet to estimate what total dollar amount and percentage of your revenue will need to be allocated toward raw materials and other costs. It's a good idea to contact any suppliers you'd have to work with before you continue on. Do the same thing for rent, taxes, insurance(s), etc. It's also important you understand the different types of budgets you'll need to set up for your small business and how to implement them.

3. Factor in Some Slack

Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are estimates and not set in stone. Because of this, it's wise to factor in some slack and make sure that you have more than enough money socked away (or coming in) before expanding the business or taking on new employees.

4. Look to Cut Costs

If times are tight and money must be found somewhere in order to pay a crucial bill, advertise, or otherwise capitalize on an opportunity, consider cost-cutting . Specifically, take a look at items that can be controlled to a large degree. Another tip is to wait to make purchases until the start of a new billing cycle or to take full advantage of payment terms offered by suppliers and any creditors. Some thoughtful maneuvering here could provide the business owner with much-needed breathing and expansion room.

5. Review the Business Periodically

While many firms draft a budget yearly, small business owners should do so more often. In fact, many small business owners find themselves planning just a month or two ahead because business can be quite volatile, and unexpected expenses can throw off revenue assumptions. Establishing a budget planning calendar can be an effective tool for business owners to ensure they have enough capital to meet their business needs.

6. Shop Around for Services/Suppliers

Don't be afraid to shop around for new suppliers or to save money on other services being performed for your business. This can and should be done at various stages, including when purchasing or starting up a business, when setting annual or monthly budgets, and during periodic business reviews.

The Bottom Line

Budgeting is an easy, but essential process that business owners use to forecast (and then match) current and future revenue to expenses. The goal is to make sure that enough money is available to keep the business up and running, to grow the business, to compete, and to ensure a solid emergency fund.

University of California, Irvine, Accounting & Fiscal Services. " Understanding Fiscal Years and Fiscal Periods ."

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Business Budget Essentials: Strategies for Financial Success

• Banking & Finance
• Bookkeeping
• Business Operations
• Starting a Business

A business budget is an essential tool for any company, regardless of its size or industry. It serves as a financial plan that estimates future revenue and expenses, helping businesses stay on track to meet their financial goals. By creating a detailed and accurate budget, companies can effectively allocate resources, control costs, and foresee potential financial challenges, thus ensuring smooth operations and overall success.

Understanding the basics of business budgeting is crucial for any entrepreneur. To set up a business budget, you must first gather financial data, establish revenue and expense categories, and project cash flow based on historical trends, anticipated changes in the market, and other relevant factors. Regular review and adjustment of the budget is also essential, as it helps identify potential discrepancies between projected and actual figures, allowing for timely corrections and adjustments in strategy.

Key Takeaways

• A business budget is a vital financial plan for predicting and managing expenses, revenue, and profits.
• Setting up a budget entails gathering data, categorizing revenue and expenses, and projecting cash flow.
• Regular budget review and adjustment help businesses stay on track to meet their financial goals.

Understanding Business Budgeting

The purpose of a business budget.

A business budget is a crucial financial tool that enables businesses to strategically plan their income and expenses over a specific period of time. A well-prepared budget helps in determining the available funds, allocating resources effectively, and identifying potential problems early on. The primary goals of business budgeting include tracking the company’s financial performance, managing cash flow, and ensuring long-term financial stability.

Business budgets are also essential for forecasting revenue and setting financial targets for the business. By comparing actual financial performance with the budget, businesses can evaluate their progress and implement improvements or adjustments if needed.

Key Components of a Business Budget

• Revenue : This is the projected income a business expects to generate from sales, investments, or other sources during a specified period. An accurate revenue estimate is critical for creating a realistic budget, and it is usually based on historical financial data or external market research.
• Expenses : These are the costs that a company incurs to operate and generate income. Expenses can be classified into fixed costs, which remain constant regardless of the level of production, and variable costs, which change in proportion to the volume of goods and services produced. Common examples of expenses include salaries, rent, utilities, and raw materials.
• Profit : The profit represents the difference between the revenue and total expenses. A positive value indicates that the business is generating income, while a negative value points toward a loss. Monitoring profit levels over time can provide insights into a company’s operational efficiency and financial health.
• Cash Flow : Cash flow refers to the inflow and outflow of money within a business. It is a crucial component of a budget, as it helps to determine the company’s liquidity position and ensure that funds are available to cover expenses, investments, or unexpected costs. A positive cash flow is essential for the growth and stability of the business.

When creating a business budget, it is vital to analyze each of the components mentioned above and make appropriate adjustments to align them with the company’s financial goals. A thorough understanding of business budgeting can ensure that the management team is well-prepared to navigate the ever-changing business landscape and guide the organization towards a successful and prosperous future.

Setting Up Your Business Budget

Choosing the right business budget template.

Selecting the appropriate business budget template is crucial for organizing your financial plan. You can leverage various tools, such as Microsoft Excel and Google Sheets , which offer multiple pre-made templates. While selecting a small-business budget template, consider the following:

• Monthly vs. Yearly : Decide if a monthly or yearly budget would be more appropriate for your business. Monthly budgets are ideal for businesses that require frequent updates, while yearly budgets are suitable for a broader overview.
• Forecasting Capabilities : Ensure your chosen template allows you to forecast future financial scenarios, which can help you plan and adjust your strategies accordingly.
• Startup or Ongoing : Choose a budget template designed for a startup or an ongoing business, depending on your organization’s stage.

In addition to pre-made templates, you can also create customized budget spreadsheets in Excel or Google Sheets to meet your specific financial needs.

Structuring Your Budget Plan

Begin by structuring your budget with the following essential components:

• Income : List all sources of revenue, including sales, investments, and any other income streams.
• Fixed Expenses : Identify all recurring and necessary costs, such as rent, utilities, and insurance.
• Variable Expenses : These are costs that may change monthly, such as supplies, travel, and advertising.
• Discretionary Expenses : Indicate any non-essential costs that can be adjusted, like team-building events or extra software subscriptions.

An example of a budget breakdown in table format can be as follows:

By diligently setting up your business budget and selecting the right tools and templates, you can better monitor and control your organization’s spending. This enables you to make informed financial decisions that will contribute to your company’s growth and success.

Operating Budget Essentials

An operating budget is an essential tool for businesses as it provides a detailed forecast of the revenues and expenses expected to be incurred during a specific operational period, typically a year. It helps in planning and controlling the day-to-day operations of a business.

Calculating Fixed and Variable Costs

Fixed costs are expenses that remain constant, regardless of the level of production or sales. These costs are essential for maintaining the infrastructure of a business and generally include expenses such as:

• Software licenses

To calculate fixed costs, simply add up all the regular, non-changing expenses required to run the business during the specified period.

Variable costs , on the other hand, change in direct proportion to the level of production or sales. These costs include:

• Raw materials
• Labor costs
• Sales commissions

Variable costs can be calculated by identifying the cost per unit produced or sold and multiplying it by the total number of units. For better budgeting, it’s important to differentiate between the fixed and variable costs as it helps in understanding the company’s break-even point and profit margins.

Revenue Estimation and Sales Projection

Revenue estimation and sales projection are critical components of an operating budget. Accurate revenue forecasting enables businesses to make informed decisions on resource allocation and helps identify growth opportunities.

The following steps can help in estimating the revenue and projecting sales figures:

• Analyze historical sales data : Reviewing past sales data can help in identifying patterns, trends, and seasonality in your business, which will be useful in generating accurate projections.
• Evaluate the market : Analyzing the market size, demand, and competition will give you a better understanding of potential revenue streams.
• Set sales targets : Set both short-term and long-term sales targets based on the information gathered from steps 1 and 2.
• Calculate the total projected revenue : Multiply the projected sales volume by the average price per unit to arrive at your total revenue estimate.

Keep in mind that revenue estimation and sales projection should be regularly updated and adjusted based on sales performance, market conditions, and other relevant factors. An effective operating budget serves as a roadmap for the company’s financial success and allows business owners to make informed decisions for the future.

Managing Cash Flow

Monitoring income and expenditures.

Managing cash flow effectively involves keeping a watchful eye on both income and expenses. Businesses should regularly track their accounts receivable and strive to reduce the time it takes customers to pay. Timely invoicing and offering incentives for early payments can help expedite cash inflow. Regularly reviewing one’s income sources and ensuring they are reliable and sufficient is also crucial. Additionally, expanding income streams can further strengthen cash flow.

On the other hand, monitoring expenses is equally important. A good practice is to categorize expenses, separating fixed costs from variable ones. Addressing and cutting down on unnecessary or excessive spending can prevent cash from being tied up in unproductive areas. Some aspects to consider are:

• Inventory management : Optimizing inventory levels can help free up cash that would otherwise be tied up in excess stock.
• Negotiating better payment terms with suppliers to match when cash inflow is expected.
• Explore options to reduce overhead costs.

Improving Positive Cash Flow

To maintain a healthy cash flow, it is essential to consistently work on improving positive cash flow. Some strategies to adopt include:

• Create a cash flow forecast : A cash flow forecast should provide a clear projection of actual numbers for expected cash inflows and outflows for a specific period. This will give the business a better understanding of its financial performance.
• Invest in technology : Implementing financial software and tools can simplify cash flow tracking, resulting in more accurate data and efficient management.
• Encourage faster payments : Offer discounts for early payments, require upfront deposits, or accept multiple payment methods to speed up the cash collection process.

To sum it up, implementing these cash flow management strategies can help businesses effectively monitor their income and expenditures, thereby ensuring a stable and positive cash flow. This, in turn, assists businesses in making informed decisions for a successful financial future.

Financial Planning and Analysis

Financial planning and analysis (FP&A) is a critical component of a successful business strategy. It involves a comprehensive examination of financial data to guide decision-making and ensure the company remains profitable. By analyzing operating budgets, costs, expenses, and income, businesses can gain valuable insights that drive performance and help achieve strategic goals.

Profit Analysis and Optimization

One important aspect of FP&A is profit analysis and optimization. This process involves evaluating the company’s income sources, ensuring that they are generating sufficient revenue to cover costs and expenses. By carefully analyzing the financial data, businesses can identify areas for improvement and take informed decisions to boost their bottom line.

Some key components in profit analysis include:

• Revenue Sources: Identify and monitor the various income streams of the company.
• Profit Margins: Assess the profitability of each product or service offering, allowing for adjustments where necessary.
• Performance Metrics: Use metrics such as return on investment (ROI) or return on equity (ROE) to gauge the effectiveness of existing strategies and investments.

Expense Management and Cost Reduction

Another crucial aspect of FP&A is expense management and cost reduction. This approach focuses on identifying areas where the company can cut costs without negatively impacting overall performance. Effective expense management involves:

• Operating Budgets: Develop realistic operating budgets to track and manage expenses throughout the fiscal year.
• Cost Analysis: Regularly review and analyze costs to identify areas where savings can be realized.
• Vendor Negotiations: Engage in negotiations with suppliers and service providers to secure better rates or more favorable terms.

A few strategies for cost reduction include:

• Reducing overhead expenses
• Implementing process improvements to increase efficiency
• Consolidating suppliers to leverage economies of scale

By focusing on financial planning and analysis, businesses can maintain profitability while actively managing their expenses. With a well-formulated FP&A strategy, companies are better equipped to make informed decisions that lead to long-term success.

Budgeting for Small Businesses

Adapting the budget for small business needs.

For small businesses, creating a budget is essential for managing finances and ensuring long-term success. The main components of a small business budget include revenues, fixed costs, variable expenses, and profit. Start by estimating revenues, taking into account factors such as sales volume, price per unit, and external market factors.

Next, list all fixed costs, such as rent, insurance, and utilities. Fixed costs are expenses that do not change with fluctuations in sales or production volume. Identify and record all variable expenses, including the cost of goods sold, salaries, wages, and benefits. Variable expenses typically change in relation to sales volume or production output.

As a small business owner, it is important to monitor your budget closely and be prepared to make adjustments when necessary. For example, if sales decrease or expenses increase, you may need to revise your budget to ensure that your company remains profitable.

Small Business Budgeting Tools

To help manage your small business budget, there are a variety of tools and resources available. Some popular accounting software options include QuickBooks and Capterra, which provide features tailored specifically for small businesses. These tools can help streamline the budgeting process by automating tasks such as tracking income and expenses, generating reports, and managing cash flow.

In addition to accounting software, numerous websites offer free small-business budget templates. These templates are typically available in spreadsheet format and can be customized to fit your company’s specific needs. By using a template, you can easily input your financial data and quickly create a visual representation of your budget.

When choosing budgeting tools for your small business, it’s essential to consider factors such as ease of use, cost, and the level of support offered by the software provider. By investing in quality resources, you can efficiently manage your small business budget and set yourself up for financial success.

Budget Review and Adjustment

Analyzing budget variances.

Budgeting involves setting financial goals and expectations for a given period, such as a quarter or a year. It’s crucial to review your business budget periodically to evaluate its performance and make necessary adjustments. One way to measure your budget’s effectiveness is by analyzing budget variances.

Budget variances occur when there’s a difference between the projected income or expenses and the actual earnings or spending. To analyze these variances, start by comparing your budgeted revenue and expenses against the actual figures for the same period.

Identify significant variances in these categories by calculating the relative difference between budgeted and actual figures in percentage terms.

• Calculate the percentage variance for each category: (Actual – Budgeted) / Budgeted * 100
• Determine if these variances are favorable (positive) or unfavorable (negative).

Understanding the causes of significant variances can help you make more informed decisions about budget adjustments. If unfavorable variances are due to external factors or changing market conditions, it may be time to revise your business strategy.

Adapting to Financial Changes

Periodic budget reviews allow businesses to adapt to financial changes and stay on track with their strategic goals. If your analysis reveals any major discrepancies between your budget projections and actual performance, consider making the following adjustments:

• Revisit budget objectives : Ensure your budget objectives align with your current financial situation and business strategy.
• Prioritize adjustments : Focus on the most significant variances or those that impact your business’s financial health and strategic goals.
• Explore revenue opportunities : Determine if there are additional ways to increase earnings and reduce unfavorable variances, such as introducing new products or services.
• Review expenses : Identify any unnecessary spending or opportunities for cost savings to address unfavorable variances in costs.
• Stay flexible and proactive : Be prepared to adjust your budget as needed, considering changes in market conditions, customer demand, or unexpected exceptions to pursue new opportunities.

Through consistent budget review and adjustment, businesses can maintain optimal performance, remain responsive to changing conditions, and achieve their financial goals.

Advanced Budgeting Strategies

Forecasting future financial trends.

A crucial aspect of advanced budgeting is the ability to forecast future financial trends. By analyzing historical data and keeping an eye on current market conditions, businesses can make informed decisions on how to allocate resources effectively. One useful tool for forecasting is the startup budget template that helps visualize financial goals, expenses, and projections.

It’s essential to consider various factors such as economic climate, industry trends, and advancements in technology. Regularly updating the forecast with the latest information keeps the business prepared for market shifts and allows for strategic adjustments.

To forecast effectively, businesses should:

• Develop a strong understanding of the market and industry
• Utilize historical financial data to identify patterns and trends
• Factor in potential external changes, such as economic or regulatory shifts
• Regularly update and adjust the forecast based on new information

Budgeting for Growth and Expansion

When planning for growth and expansion, businesses must carefully allocate capital and resources to ensure success. Investing in new technology and human resources is vital, but it’s also crucial to plan for unexpected costs and challenges.

• Set realistic financial goals: A well-defined and achievable financial objectives are crucial for guiding the budgeting process.
• Invest in technology: Technology investments not only improve operations but also help businesses stay competitive in the market. Regularly evaluate the potential benefits and returns on technology investments.
• Allocate resources for human capital: Growth requires skilled personnel to execute strategies and manage operations effectively. Ensure the budget accommodates the recruitment and training of new employees.
• Consider external investment: Sometimes, additional funds may be needed for expansion. Evaluate opportunities for external investment, such as loans, grants or venture capital.
• Prepare for unexpected costs: Growth and expansion come with potential risks and unforeseen expenses. Business owners should plan and allocate funds to handle such situations.

By forecasting future financial trends and budgeting for growth, business owners can position their organizations for long-term success and resilience in a competitive market landscape.

Frequently Asked Questions

What are the essential components of a business budget.

A business budget typically consists of three main components: income, expenses, and the difference between the two, called the net income or profit. Income includes sales revenue and any other sources of income, such as interest or investments. Expenses are divided into fixed expenses, which occur regularly, and variable expenses, which fluctuate depending on the company’s activities. The net income represents the remaining profit or loss after deducting expenses from income.

How do you create an effective business budget plan?

To create an effective business budget plan, follow these steps:

• Analyze past financial data to understand the company’s historical performance.
• Set realistic financial goals and objectives for the future.
• Estimate future income based on sales forecasts and other revenue sources.
• Estimate future expenses, including fixed and variable costs, as well as any potential investments.
• Calculate the net income by subtracting anticipated expenses from projected income.
• Monitor and update the budget regularly to adapt to changes in the business environment and evaluate its effectiveness.

What budgeting methods are best suited for small to medium-sized enterprises?

The most commonly used budgeting methods for small to medium-sized enterprises (SMEs) are:

• Incremental budgeting: Builds upon the previous year’s budget, making adjustments for estimated changes in income and expenses.
• Zero-based budgeting: Requires justifying the need for every expense from scratch in each budgeting cycle, prioritizing allocation of funds based on importance.
• Cash flow budgeting: Focuses on forecasting cash inflows and outflows, ensuring that the business has sufficient funds to cover expenses and operational needs.

Each method has its own advantages and drawbacks, and the selection depends on the company’s size, industry, and management style.

How should one allocate funds within a business budget?

The allocation of funds within a business budget should be based on strategic priorities, which may include increasing sales, expanding the customer base, or improving operational efficiency. Funds should be allocated to essential expenses, such as rent, utilities, employee salaries, and crucial resources needed to maintain or grow the business. Additionally, the budget should include allocations for variable expenses and planned investments. Lastly, it’s essential to maintain a financial cushion to handle unexpected situations or emergencies.

Can you explain how to calculate and adjust a business budget over time?

Calculating a business budget starts with estimating revenues and expenses for a specific period. First, project your income sources based on sales forecasts, recurring revenue, and any other relevant data. Second, estimate fixed and variable expenses, incorporating adjustments for planned changes or growth of the business. Subtracting your total expenses from total revenue will give you the projected net income.

Adjusting a business budget over time involves monitoring and comparing actual results with budgeted figures. Regular reviews will highlight any discrepancies between the budgeted plan and actual performance, allowing for corrective actions, reallocations, or changes to the budget to better align with the company’s goals.

What tools or templates can assist in the creation and management of a business budget?

Various tools and templates can assist in creating and managing a business budget. Spreadsheets, like Microsoft Excel or Google Sheets, are commonly used for budgeting due to their customizability and ease of use. Online accounting software and budgeting platforms, such as QuickBooks or Xero, offer more advanced features and integrations with other financial tools. Additionally, numerous free and paid templates are available online, catering to different industries and business sizes. These templates usually include categories and formulas to simplify the budget creation process, allowing users to focus on forecasting and decision-making.

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How to Create a Small Business Budget in 5 Simple Steps

Want to protect the financial health of your small business? You need a business budget. Here's how to create one.

When you build a business, there are a lot of things to stay on top of, from marketing and finding new  clients  to building a website and establishing your digital presence. But there’s one element that you want to stay on top of from the very beginning—and that’s your business budget.

Having a detailed and accurate budget is a must if you want to build a thriving, sustainable business. But how, exactly, do you create one? What are the steps for business budget planning?

As a small business owner, let’s take a look at how to create a business budget in five simple, straightforward steps.

What’s a Business Budget—and Why Is It Important?

Before we jump into creating a business budget, let’s quickly cover what a business budget is—and why it’s so important for small businesses.

A business budget is an overview of your business funds. It outlines key information on both the current state of your finances (including income and expenses) and your long-term financial goals. Because your budget will play a key role in making sound financial decisions for your business, it should be one of the first tasks you tackle to improve business success.

And, as a  financially savvy owners, you’ll also want to have a budget in place to help you:

• Make sound financial decisions.  In many ways, your business budgets are like a financial road map. It helps you evaluate where your  business finances  currently stand—and what you need to do to hit your financial goals in the future for business growth.
• Identify where to cut spending or grow revenue.  Your business budgets can help you identify areas to decrease your spending or increase your revenue, which will increase your  profitability  in the process, outline unexpected costs, and help your sustain your business goals.
• Land funding to grow your business.  If you’re planning to apply for a business loan or raise funding from investors, you’ll need to provide a detailed budget that outlines your income and expenses.

Now that you understand why budget creation is so important to your business decisions, let’s jump into how to do it.

Business Budget Step 1: Tally Your Income Sources

First things first. When building a small business budget, you need to figure out how much money your business is bringing in each month and where that money is coming from – this will hep create an operating budget based on your business income.

Your sales figures (which you can access using the Profit & Loss report function in FreshBooks) are a great place to start. From there, you can add any other sources of income for your business throughout the month.

Your total number of income sources will depend on your business model.

For example, if you run a  freelance  writing business, you might have multiple sources of income from:

• Freelance writing projects
• A writing course you sell on your website
• Consulting with other writers who are starting small businesses

Or, if you run a brick-and-mortar retail business, you may only have one source of income from your store sales.

However many income sources you have, make sure to account for any and all income that’s flowing into your business—then tally all those sources to get a clear picture of your total monthly income to build your master business budget template.

Business Budget Step 2: Determine Fixed Costs

Once you’ve got a handle on your income, it’s time to get a handle of your costs—starting with fixed costs.

Your fixed costs are any expenses that stay the same from month to month. This can include expenses like rent, certain utilities (like internet or phone plans), website hosting, and payroll costs.

Review your expenses (either via your bank statements or through your FreshBooks reports) and see which costs have stayed the same from month to month. These are the expenses you’re going to categorize as fixed costs.

Once these costs are determined, add them together to get your total fixed and variable costs expense for the month.

TIP:   If you’re just starting your business and don’t have financial data to review, make sure to use projected costs. For example, if you’ve signed a lease for office space, use the monthly rent you will pay moving forward.

Business Budget Step 3: Include Variable Expenses

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Variable costs don’t come with a fixed price tag—and will vary each month based on your business performance and activity. These can include things like usage-based utilities (like electricity or gas), shipping costs, sales commissions, or travel costs.

Variable expenses will, by definition, change from month to month. When your profits are higher than expected, you can spend more on the variables that will help your business scale faster. But when your profits are lower than expected, consider cutting these variable costs until you can get your profits up.

At the end of each month, tally these expenses. Over time, you’ll get a sense of how these expenses fluctuate with your business performance or during certain months, which can help you make more accurate financial projections and budget accordingly.

Business Budget Step 4: Predict One-Time Spends

Many of your business expenses will be regular expenses that you pay for each month, whether they’re fixed or variable costs. But there are also costs that will happen far less frequently. Just don’t forget to factor those expenses when you create a budget as well.

If you know you have one-time spends on the horizon (for example, an upcoming business course or a new laptop), adding them to your budget can help you set aside the financial resources necessary to cover those expenses—and protect your business from unexpected costs in the form of a sudden or large financial burden.

On top of adding planned one-time spends to your budget, you should also add a buffer to cover any unplanned purchases or expenses, like fixing a damaged cell phone or hiring an IT consultant to deal with a security breach. That way, when an unexpected expense pops up (and they always do), you’re prepared!

Business Budget Step 5: Pull It All Together

You’ve gathered all of your income sources and all of your revenue and expenses. What’s next? Pulling it all together to get a comprehensive view of your financial standing for the month.

On your businesses master budget, you’ll want to tally your total income and your total expenses (i.e., adding your total fixed costs, variable expenses, cost of goods, and one-time spends)—then compare cash flow in (income) to cash flow out (expenses) to determine your overall profitability.

Having a hard time visualizing what a business budget looks like in action? Here’s an operating budget example to give you an idea of what your new business budget might look like each month:

A Client Hourly Earnings: $5,000 B Client Hourly Earnings: $4,500 C Client Hourly Earnings: $6,000 Product Sales: $1,500 Loans: $1,000 Savings: $1,000 Investment Income: $500

Total Income: $19,500

Fixed Costs

Rent: $1,000 Internet: $50 Payroll costs: $5,000 Website hosting: $50 Insurance: $50 Government and bank fees: $25 Cell phone: $50 Accounting services : $100 Legal services: $100

Total Fixed Costs: $6,425

Variable Expenses

Sales commissions: $2,000 Contractor wages: $500 Electricity bill: $125 Gas bill: $75 Water bill: $125 Printing services: $300 Raw materials: $200 Digital advertising costs: $750 Travel and events: $0 Transportation: $50

Total Variable Expenses: $4,125

One-Time Spends

Office furniture: $450 Office supplies for new location: $300 December business retreat: $1,000 New time tracking software: $500 Client gifts : $100

One-Time Spends: $2,350

Expenses: $12,900

Total Income ($19,500) – Total Expenses ($12,900) = Total Net Income ($6,600)

Above all, once you have a clear sense of your profitability for the month, you can use it to make the right financial decisions for your small business moving forward.

For example, if you realize you’re in the red and spending more than you earn, you might cut your spending and focus on  finding new clients . Alternatively, if your income is significantly higher than your expenses, you might consider investing your profits back into your business (like investing in new software or equipment).

Use Your Business Budget to Stay on Track

Putting in the work to create a budget for your small business may seem like a hassle. But while it takes a bit of time and energy, it’s worth the extra effort. Thorough business budgeting gives you the financial insights you need to make the right decisions for your business to grow, scale, and prosper in the future.

This post was updated in October 2023

Written by Deanna deBara , Freelance Contributor

Posted on June 20, 2017

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Free Business Budget Templates for Any Company

By Andy Marker | February 23, 2017

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Creating a budget is always a good idea, but it’s even more crucial when you run a business. Failure to properly budget can seriously impact your bottom line, and even jeopardize the success of your enterprise. By making and following a budget, you can better control costs, avoid overspending, and plan to meet financial goals. 

Of course, you’ll also need to document and track your budget. Using business budgeting worksheets for this purpose can help you: 

• Set and achieve profit goals
• Track revenue, expenses, and cash flow
• Cut unnecessary spending
• Properly allocate revenue to other areas of the business
• Prepare for busy seasons and slowdowns
• Plan for required purchases, such as equipment and materials
• Gauge the positive impact of budget changes
• Secure funding from current and potential investors or financial institutions
• Keep colleagues and coworkers informed on the financial health of the business
• Project startup costs, monthly operational expenses, and revenue needed to break even

To help you get started, we’ve created a variety of business budget templates for Excel that you can use for any organization - from startup companies to established enterprises. Download the template that best fits your needs, and start planning for financial success.

Business Budget Template

‌   Download Excel Template

Try Smartsheet Template   ‌

Use this basic business budgeting template to track monthly income and expenses for companies of any size. This template has separate sheets to create budgets for either services- or goods-based businesses. Income and expenses are also broken down by category to provide a closer look at where company funds are made and spent.

12-Month Business Budget Template

For a more detailed view of your company’s financials over time, use this business budgeting spreadsheet. Enter your revenue and expense estimations for each month and the entire year. Then, add your actual income and expenditures month by month to see how closely you’re meeting your budget (the accuracy of your estimates). Income and expense categories are broken out, so you can clearly see where funds are going to and coming from.

Department Budget

To make sure your department is staying within its allotted budget, use this Excel business budget template. It allows you to plot yearly income and expenses for a company or academic department, and compare the percentage change year over year. View revenue and expense subtotals by category to see where you can make cuts, and identify any surpluses.

Detailed Financial Projections Spreadsheet

For larger, more complex businesses, you need more comprehensive business budget plans. This detailed spreadsheet tracks all the information you need to make important financial decisions — from startup costs to sales and operating expense forecasts. Estimate and track payroll costs, accounts payable and receivable, the cost of goods sold, lines of credit, and monthly fixed costs. You can also compare year-end totals against one another.

First-Year Budget Calculator

If you’re getting ready to launch a startup, a small business budget template can be a useful tool. This basic calculator can help you quickly gauge costs for your new venture and estimate your first-year business income. It also includes a column for plotting monthly personal expenses, along with available cash from savings and other sources. This way, you can estimate the amount you’ll need to get your new business off the ground.

Professional Business Budget Template

Download Professional Business Budget Template

Excel | Smartsheet

This comprehensive budget template is ideal for larger, more established businesses: it offers one sheet for estimated expenditures (labor costs, office expenses, marketing spending, travel fees, etc.), and another sheet to plot expenses that accrue. It also allows you to track expense variances and offers charts for analyzing how closely your business is adhering to its budget.

Project Budget Template

‌‌  Download Excel Template

Need to create a specific, detailed budget for a particular job? This business budget worksheet can help you track income and expenses at the individual project level. Calculate labor, materials, and fixed costs for individual tasks across different categories, and compare estimated against actual expenses and revenues. Keep per-project spending under control with this business budget spreadsheet.

Small Business Budget Template

If you run a small business or are self-employed, use this small business budget template to track and manage your finances. This basic budget planner has one sheet for tracking income sources, one for expense types, and another for cash transactions. Easily track monthly income and expenses and calculate total profits.

Start-up Budget Template

Download Start-up Budget Template

Are you opening a new business? Using small business budgeting templates can help you manage finances properly from day one. If you plan effectively, you’ll lay a strong economic foundation for your company as it grows. This small business budget template allows you to track estimated versus actual funding sources and amounts, determine pre-opening costs, and calculate ongoing expenses so you’ll know how much income you need to come out ahead.

What’s in a Business Budget?

According to the U.S. Small Business Administration (SBA), a business budget should contain the following information:

• Expected sales and revenues
• Fixed costs (those that don’t depend on sales, such as rent and business license expenses)
• Variable costs (items related to sales, such as materials and production expenses)
• Semi-variable costs (those that may or may not change depending on sales, such as wages and marketing fees)
• Profits (expected sales and income minus costs)

You may also choose to include additional information in your budget, depending on your business size and the level of financial information you want to track. For example, if you run a startup, you may want to include data on the total cost of getting your business up and running, as well as the amounts and sources of investor funding. If you have a large enterprise with multiple branch offices, you may want to create separate sheets for each location, as well as for the company’s overall budget. 

How to Create a Business Budget Plan

When creating your initial budget, you can use a business budget template to help calculate revenues, expenses, and profits. You may also choose to purchase business budget software to create a more detailed plan. Whatever method you choose, follow these basic steps when forming a budget:

• Gather historical information: If you have an established business, collect historical data on operating expenses, salaries, sales, and revenues over time. If you’re starting a new business, look for financial information on a business similar to yours (in size and type) and use it as a benchmark.
• Estimate sales and set profit goals: Calculate the sales you expect to make during different times of the year, factoring in holidays, office or plant closures, and seasonal booms and lulls. Set profit goals, and make realistic revenue projections for the year and into the future.
• Determine fixed and variable costs: Calculate all the fixed costs involved in operating your business such as rent, insurance, and business licenses. Also determine estimates for your variable costs, including materials and equipment, labor, salaries for company executives, employee benefits, and training and travel expenditures. 
• Calculate your profit margin: To determine how much profit you expect the business to make, subtract your expenses from estimated sales and revenues. Include the total cost of goods sold (the total amount it costs to produce your product or service), and factor in other costs like shipping, equipment, and materials for your office or production facility. 
• Adjust your budget over time: Continually update your budget over time to see how your estimates compare with actual sales and expenses. If you’re not making a profit, try adjusting your budget to increase revenues and decrease overhead costs. 

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Budgeting and business planning

Once your business is operational, it's essential to plan and tightly manage its financial performance. Creating a budgeting process is the most effective way to keep your business - and its finances - on track.

This guide outlines the advantages of business planning and budgeting and explains how to go about it. It suggests action points to help you manage your business' financial position more effectively and ensure your plans are practical.

Planning for business success

The benefits, what to include in your annual plan, a typical business planning cycle, budgets and business planning, benefits of a business budget, creating a budget, key steps in drawing up a budget, what your budget should cover, what your budget will need to include, use your budget to measure performance, review your budget regularly.

When you're running a business, it's easy to get bogged down in day-to-day problems and forget the bigger picture. However, successful businesses invest time to create and manage budgets, prepare and review business plans and regularly monitor finance and performance.

Structured planning can make all the difference to the growth of your business. It will enable you to concentrate resources on improving profits, reducing costs and increasing returns on investment.

In fact, even without a formal process, many businesses carry out the majority of the activities associated with business planning, such as thinking about growth areas, competitors, cashflow and profit.

Converting this into a cohesive process to manage your business' development doesn't have to be difficult or time-consuming. The most important thing is that plans are made, they are dynamic and are communicated to everyone involved. See the page in this guide on what to include in your annual plan.

The key benefit of business planning is that it allows you to create a focus for the direction of your business and provides targets that will help your business grow. It will also give you the opportunity to stand back and review your performance and the factors affecting your business. Business planning can give you:

• a greater ability to make continuous improvements and anticipate problems
• sound financial information on which to base decisions
• improved clarity and focus
• a greater confidence in your decision-making

The main aim of your annual business plan is to set out the strategy and action plan for your business. This should include a clear financial picture of where you stand - and expect to stand - over the coming year. Your annual business plan should include:

• an outline of changes that you want to make to your business
• potential changes to your market, customers and competition
• your objectives and goals for the year
• your key performance indicators
• any issues or problems
• any operational changes
• information about your management and people
• your financial performance and forecasts
• details of investment in the business

Business planning is most effective when it's an ongoing process. This allows you to act quickly where necessary, rather than simply reacting to events after they've happened.

• Review your current performance against last year/current year targets.
• Work out your opportunities and threats.
• Analyse your successes and failures during the previous year.
• Look at your key objectives for the coming year and change or re-establish your longer-term planning.
• Identify and refine the resource implications of your review and build a budget.
• Define the new financial year's profit-and-loss and balance-sheet targets.
• Conclude the plan.
• Review it regularly - for example, on a monthly basis - by monitoring performance, reviewing progress and achieving objectives.
• Go back to 1.

New small business owners may run their businesses in a relaxed way and may not see the need to budget. However, if you are planning for your business' future, you will need to fund your plans. Budgeting is the most effective way to control your cashflow, allowing you to invest in new opportunities at the appropriate time.

If your business is growing, you may not always be able to be hands-on with every part of it. You may have to split your budget up between different areas such as sales, production, marketing etc. You'll find that money starts to move in many different directions through your organisation - budgets are a vital tool in ensuring that you stay in control of expenditure.

A budget is a plan to:

• control your finances
• ensure you can continue to fund your current commitments
• enable you to make confident financial decisions and meet your objectives
• ensure you have enough money for your future projects

It outlines what you will spend your money on and how that spending will be financed. However, it is not a forecast. A forecast is a prediction of the future whereas a budget is a planned outcome of the future - defined by your plan that your business wants to achieve.

There are a number of benefits of drawing up a business budget, including being better able to:

• manage your money effectively
• allocate appropriate resources to projects
• monitor performance
• meet your objectives
• improve decision-making
• identify problems before they occur - such as the need to raise finance or cash flow difficulties
• plan for the future
• increase staff motivation

Creating, monitoring and managing a budget is key to business success. It should help you allocate resources where they are needed, so that your business remains profitable and successful. It need not be complicated. You simply need to work out what you are likely to earn and spend in the budget period.

Begin by asking these questions:

• What are the projected sales for the budget period? Be realistic - if you overestimate, it will cause you problems in the future.
• What are the direct costs of sales – i.e. costs of materials, components or subcontractors to make the product or supply the service?
• What are the fixed costs or overheads?

You should break down the fixed costs and overheads by type, e.g.:

• cost of premises, including rent, municipal taxes and service charges
• staff costs –e.g. wages, benefits, Québec Parental Insurance Plan (QPIP) premiums, contributions to the Québec Pension Plan (QPP) and to the financing of the Commission des normes du travail (CNT)
• utilities – e.g. heating, lighting, telephone
• printing, postage and stationery
• vehicle expenses
• equipment costs
• advertising and promotion
• travel and subsistence expenses
• legal and professional costs, including insurance

Your business may have different types of expenses, and you may need to divide up the budget by department. Don't forget to add in how much you need to pay yourself, and include an allowance for tax.

Your business plan should help in establishing projected sales, cost of sales, fixed costs and overheads, so it would be worthwhile preparing this first. See the page in this guide on planning for business success.

Once you've got figures for income and expenditure, you can work out how much money you're making. You can look at costs and work out ways to reduce them. You can see if you are likely to have cash flow problems, giving yourself time to do something about them.

When you've made a budget, you should stick to it as far as possible, but review and revise it as needed. Successful businesses often have a rolling budget, so that they are continually budgeting, e.g. for a year in advance.

There are a number of key steps you should follow to make sure your budgets and plans are as realistic and useful as possible.

Make time for budgeting

If you invest some time in creating a comprehensive and realistic budget, it will be easier to manage and ultimately more effective.

Use last year's figures - but only as a guide

Collect historical information on sales and costs if they are available - these could give you a good indication of likely sales and costs. But it's also essential to consider what your sales plans are, how your sales resources will be used and any changes in the competitive environment.

Create realistic budgets

Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.

It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. For example, if your unit costs reduce by 10 per cent for each additional 20 per cent of sales, how much will your unit costs decrease if you have a 33 per cent rise in sales?

Make sure your budgets contain enough information for you to easily monitor the key drivers of your business such as sales, costs and working capital. Accounting software can help you manage your accounts.

Involve the right people

It's best to ask staff with financial responsibilities to provide you with estimates of figures for your budget - for example, sales targets, production costs or specific project control. If you balance their estimates against your own, you will achieve a more realistic budget. This involvement will also give them greater commitment to meeting the budget.

Decide how many budgets you really need. Many small businesses have one overall operating budget which sets out how much money is needed to run the business over the coming period - usually a year. As your business grows, your total operating budget is likely to be made up of several individual budgets such as your marketing or sales budgets.

Projected cash flow  -your cash budget projects your future cash position on a month-by-month basis. Budgeting in this way is vital for small businesses as it can pinpoint any difficulties you might be having. It should be reviewed at least monthly.

Costs  - typically, your business will have three kinds of costs:

• fixed costs - items such as rent, salaries and financing costs
• variable costs - including raw materials and overtime
• one-off capital costs - purchases of computer equipment or premises, for example

To forecast your costs, it can help to look at last year's records and contact your suppliers for quotes.

Revenues  - sales or revenue forecasts are typically based on a combination of your sales history and how effective you expect your future efforts to be.

Using your sales and expenditure forecasts, you can prepare projected profits for the next 12 months. This will enable you to analyse your margins and other key ratios such as your return on investment.

If you base your budget on your business plan, you will be creating a financial action plan. This can serve several useful functions, particularly if you review your budgets regularly as part of your annual planning cycle.

Your budget can serve as:

• an indicator of the costs and revenues linked to each of your activities
• a way of providing information and supporting management decisions throughout the year
• a means of monitoring and controlling your business, particularly if you analyse the differences between your actual and budgeted income

Benchmarking performance

Comparing your budget year on year can be an excellent way of benchmarking your business' performance - you can compare your projected figures, for example, with previous years to measure your performance.

You can also compare your figures for projected margins and growth with those of other companies in the same sector, or across different parts of your business.

Key performance indicators

To boost your business' performance you need to understand and monitor the key "drivers" of your business - a driver is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully.

The three key drivers for most businesses are:

• working capital

Any trends towards cash flow problems or falling profitability will show up in these figures when measured against your budgets and forecasts. They can help you spot problems early on if they are calculated on a consistent basis.

To use your budgets effectively, you will need to review and revise them frequently. This is particularly true if your business is growing and you are planning to move into new areas.

Using up to date budgets enables you to be flexible and also lets you manage your cash flow and identify what needs to be achieved in the next budgeting period.

Two main areas to consider

Your actual income  - each month compare your actual income with your sales budget, by:

• analysing the reasons for any shortfall - for example lower sales volumes, flat markets, underperforming products
• considering the reasons for a particularly high turnover - for example whether your targets were too low
• comparing the timing of your income with your projections and checking that they fit

Analysing these variations will help you to set future budgets more accurately and also allow you to take action where needed.

Your actual expenditure  - regularly review your actual expenditure against your budget. This will help you to predict future costs with better reliability. You should:

• look at how your fixed costs differed from your budget
• check that your variable costs were in line with your budget - normally variable costs adjust in line with your sales volume
• analyse any reasons for changes in the relationship between costs and turnover
• analyse any differences in the timing of your expenditure, for example by checking suppliers' payment terms

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How to Create a Basic Business Budget

8 Min Read | May 16, 2024

You’d never intentionally set your business up to fail, right? But if you don’t know your numbers and how to make a business budget, that’s exactly what you’re doing. Money problems and bad accounting are two reasons why many small businesses don’t make it past their first five years. 1

Talking about budgets can feel overwhelming. We get it. For a lot of business leaders, it’s a lot more comfortable dreaming up big ideas and getting stuff done than digging into numbers. But you can’t set yourself up for steady growth until you have a handle on the money flowing in and out of your company. You also can’t enjoy financial peace in your business.

Not a numbers person? That’s okay. Follow the simple steps below to learn how to create a budget for a business and manage your finances with confidence. We’ll even give you a link to an easy-to-use small-business budget template in the EntreLeader’s Guide to Business Finances .

But before we get to that, let’s unpack what a budget is and why you need one.

Don't Let Your Numbers Intimidate You

With the EntreLeader’s Guide to Business Finances, you can grow your profits without debt—even if numbers aren’t your thing. Plus, get a free business budget template as part of the guide!

What Is a Business Budget?

A business budget is a plan for how you’ll use the money your business generates every month, quarter and year. It’s like looking through a windshield to see the expenses, revenue and profit coming down the road. Your business budget helps you decide what to do with business profit, when and where to cut spending and grow revenue, and how to invest for growth when the time comes. Leadership expert John Maxwell sums it up: “A budget is telling your money where to go instead of wondering where it went.”

But here’s what a business budget is not: a profit and loss (P&L) report you read at the end of the month. Your P&L is like a rearview mirror—it lets you look backward at what’s already happened. Your P&L statement and budget are meant to work together so you can see your financial problems and opportunities and use those findings to forecast your future, set educated goals, and stay on track.

Why Do I Need to Budget for My Business?

Creating a budget should be your very first accounting task because your business won’t survive without it. Sound dramatic? Check this out: There are 33.2 million small businesses in the United States. Out of the small businesses that opened from 1994 to 2020, 67.7% survived at least two years. But less than half survived past five years. 2    The top reasons these businesses went under? They hit a wall with cash-flow problems, faced pricing and cost issues, and failed to plan strategically . 3

As a business owner, one of the worst feelings in the world is wondering whether you’ll be able to make payroll and keep your doors open. That’s why we can’t say it enough: Make a business budget to stay more in control and have more financial peace in running your business.

A budget won’t help you earn more money, but it will help you:

• Maximize the money you’ve got
• Manage your cash flow
• Spend less than your business earns
• Stay on top of tax payments and other bills
• Know if you’re hitting your numbers so you can move at the true speed of cash

How to Create a Budget for a Business

Your ultimate goal is to create a 12–18-month business budget—and you will get there! But start by building out your first month. Don’t even worry about using a fancy accounting program yet. Good ol’ pen and paper or a simple computer document is fine. Just start! Plus, setting up a monthly budget could become a  keystone habit  that helps kick-start other smart business habits.

Here’s how to create your first budget for business:

1. Write down your revenue streams.

Your revenue is the money you earn in exchange for your products or services. You’ll start your small- business budget by listing all the ways you make money. Look at last month’s P&L—or even just your checking account statement—to help you account for all your revenue streams. You’re not filling in numbers yet. Just list what brings in revenue.

For example, if you run an HVAC business, your revenue streams could be:

• Maintenance service calls
• Repair services and sales
• New unit installation
• Insulation installation
• Air duct cleaning

2. Write down the cost of goods sold (if you have them).

Cost of goods is also called inventory. These expenses are directly related to producing your product or service. In the HVAC example, your cost of goods would be the price you pay for each furnace and air conditioning unit you sell and install. It could also include the cost of thermostats, insulation and new ductwork.

3. List your expense categories.

It’s crazy how much money can slip through the cracks when we’re not careful about putting it in the budget. Think through  all  your business expenses—down to the last shoe cover your technicians wear to protect your customers’ flooring during house calls. Here’s a list of common business budget categories for expenses to get you started:

• Office supplies and equipment
• Technology services
• Training and education

Related articles : Product Launch: 10 Questions to Ask Before You Launch a New Product New Product Launch: Your 10-Step Checklist

4. Fill in your own numbers.

Now that you have a solid list of revenue and expense categories, plug in your real (or projected) numbers associated with them. It’s okay if you’re not sure how much you’ll sell just yet or exactly how much you’ll spend. Make an educated guess if you’re just starting out. If your business has been earning money for a while, use past P&L statements to guide what you expect to bring in. Your first budget is about combining thoughtful guesswork with history and then getting a more realistic picture month over month.

5. Calculate your expected profit (or loss). 

Now, number nerds and number haters alike—buckle in. We’re about to do some basic accounting so you know whether you have a profit or loss. This is your chance to figure out exactly how much you’re spending and making in your business.

Take your  gross revenue (the total amount of money you expect to make this month) and subtract your expenses and  cost of goods sold  to find your profit or loss. Here’s what that calculation looks like:

Revenue - Expenses - Cost of Goods Sold = Profit or Loss

Don’t freak out if your first budget shows a loss. That actually happens a lot with your first few monthly budgets. You’re learning and getting context on what’s coming in and going out so you can make adjustments. Keep doing your budget, and before you know it, you’ll be a rock star at telling your money where to go, planning for emergencies ,  investments and opportunities , and building momentum.  

6. Review your budget often. 

Whew! Once you get that first business budget under your belt, take a deep breath and celebrate. You’ve just done something huge for your business! (You’ll also be happy to know, budgeting gets easier from here since you can copy and paste your first one and tweak your income and expenses each month.)

But here’s the thing: Your budget can’t just sit in a drawer or on your computer. You’ve got to look at it consistently to make sure you’re actually following it.

Weekly Review

At least once a week, someone in your business (whether it’s you, a qualified team member or a bookkeeper) needs to track your transactions so you know what’s happening with your money all month. Then you can make adjustments before you have more month than money.

Every time you review your budget, ask yourself these three questions:

• Are we on target to hit our revenue goal this month?
• If not, what we can change to get there?
• Are there any expenses we can cut or minimize?

Monthly Review

You also need to review your business budget when you close your books every month to compare it to your actuals—your P&L. Otherwise, how can you know how you’re doing?

7. Work toward a 12–18-month budget.

Now that you’ve created your first month’s budget, move on to the next one. You’ve got this! The more budget-building reps you get in, the better you’ll be at looking forward and planning for growth. In no time, you’ll reach that ultimate goal of a 12–18-month budget. Just keep adjusting as you go based on all you’re learning about getting an accurate road map for your finances.

As you start owning your numbers, remember: It’s okay if you’re a little intimidated by the process of accounting and making a budget for business. But it’s not okay to avoid the financial details that will make or break you. So just keep applying the basics we covered and keep moving forward.

Follow the steps above to create your budget, and review it often to stay on track.

Want a tool to make budget building simpler? Check out the EntreLeader’s Guide to Business Finances. It includes an easy-to-use small-business budget template in the extra resources section.

What are the benefits of budgeting?

A business budget will help you:

• Make informed, strategic decisions
• Invest in under-resourced areas
• Trim over-resourced areas
• Plan for the future
• Set goals and track your progress

Does using a small-business budget template save time?

Yes! Using a small-business budget template helps you plug in the numbers you need to operate with more confidence and fewer wrong turns. Check out the small-business-budget template inside our EntreLeader’s Guide to Business Finances .

How do I budget if I own a seasonal business?

Just like farmers put extra hay in the barn to cover leaner months, if you’re a seasonal business owner, you need to set aside resources in times of plenty to cover months your business turns down. Use your P&L statements to go back in time and look at financial performance year over year. Then, create your business budget based on what you learn and on any changes you see coming. You can also go to trade conferences to get an idea of your industry’s seasonal benchmarks.

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About the author

EntreLeadership

EntreLeadership is the part of Ramsey Solutions that exists to help small-business owners thrive by mastering themselves, rallying their teams, and imposing their will on the marketplace. Thousands of leaders use our proven EntreLeadership System and resources to develop as leaders and grow their businesses. These resources include The EntreLeadership Podcast , EntreLeadership Elite digital membership , books, live events, coaching sessions and business workshops. Learn More.

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How to Prepare a Budget for an Organization: 4 Steps

• 16 Nov 2021

An organization’s budget dictates how it leverages capital to work toward goals. For this reason, the ability to prepare a budget is one of the most crucial skills for any business leader —whether a current or aspiring entrepreneur, executive, functional lead, or manager.

Before preparing your first organizational budget, it’s important to understand what goes into a budget and the key steps involved in creating one.

What Is a Budget?

A budget is a document businesses use to track income and expenses in a detailed enough way to make operational decisions.

Budgets are typically forward-looking in nature. Income is based on projections and estimates for the periods they cover, as are expenses. For this reason, organizations often create both short- (monthly or quarterly) and long-term (annual) budgets, where the short-term budget is regularly adjusted to ensure the long-term budget stays on track.

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Most organizations also prepare what’s known as an “actual budget” or “actual report” to compare estimates against reality following the period covered by the budget. This allows an organization to understand where it went wrong in the budgeting process and adjust estimates moving forward.

Budget vs. Cash Flow Statement

If the definition above sounds similar to a cash flow statement , you’re right: Your organization’s budget and cash flow statement are similar in that they both monitor the flow of money into and out of your business. Yet, they differ in key ways.

First, a budget typically offers more granular details about how money is spent than a cash flow statement does. This provides greater context for making tactical business decisions, such as considering where to trim business expenses.

Related: The Beginner’s Guide to Reading & Understanding Financial Statements

Second, a budget is, quite literally, a tool used to direct work done within an organization. The cash flow statement plays a different role by offering a higher-level overview of how money moves into, throughout, and out of an organization.

Instead of thinking of the two documents as competing, view them as complementary, with each playing a role in driving your business’s performance.

Steps to Prepare a Budget for Your Organization

The steps below can be followed whether creating a budget for a project, initiative, department, or entire organization.

1. Understand Your Organization’s Goals

Before you compile your budget, it’s important to have a firm understanding of the goals your organization is working toward in the period covered by it. By understanding those goals, you can prepare a budget that aligns with and facilitates them.

Related: The Advantages of Data-Driven Decision-Making

For example, consider a business that regularly experiences year-over-year revenue growth that’s offset by rising expenses. That organization might benefit from focusing efforts on better controlling expenses during the budgeting process.

Alternatively, consider a company launching a new product or service. The company may invest more heavily in the fledgling business line to grow it. With this goal, the company may need to trim expenses or growth initiatives elsewhere in its budget.

2. Estimate Your Income for the Period Covered by the Budget

To allocate funds for business expenses, you first need to determine your income and cash flow for the period to the best of your ability.

Depending on the nature of your organization, this can be a simple or complicated process. For example, a business that sells products or services to known clients locked in with contracts will likely have an easier time estimating income than a business that depends on active sales activity. In the second case, it would be important to reference historical sales and marketing data to understand whether the market is changing in a way that might cause you to miss or exceed historical trends.

Related: How to Read & Understand an Income Statement

Beyond income from sales activity, you should include other income sources, such as returns on investments, asset sales, and bond or share offerings.

3. Identify Your Expenses

Once you understand your projected income for the period, you need to estimate your expenses. This process involves three main categories: fixed costs, variable expenses, and one-time expenses.

Fixed costs are any expenses that remain constant over time and don’t dramatically vary from week to week or month to month. In many cases, those expenses are locked in by some form of contract, making it easy to anticipate and account for them. This category usually includes expenses related to overhead, such as rent payments and utilities. Phone, data, and software subscriptions can also fall into this category, along with debt payments. Any expense that’s regular and expected should be included.

Related: 6 Budgeting Tips for Managers

Variable expenses are those your business incurs, which vary over time depending on several factors, including sales activities. Your shipping and distribution costs, for example, are likely to be higher during a period when you sell more product than one when you sell less product. Likewise, utilities such as water, gas, and electricity will be higher during periods of increased use. This is especially true for businesses that manufacture their own products. Sales commissions, materials costs, and labor costs are other examples of variable expenses.

Both fixed expenses and variable expenses are recurring in nature, making it easy to account for them (even if variable expenses must be projected). One-time expenses , also called “one-time spends,” don’t recur and happen more rarely. Purchasing equipment or facilities, developing a new product or service, hiring a consultant, and handling a security breach are all examples of one-time expenses. Understanding major initiatives—and what it will take to accomplish them—and what you’ve spent in previous years on similar expenses can help account for them in your budget, even if you’re unsure of their exact values.

4. Determine Your Budget Surplus or Deficit

After you’ve accounted for all your income and expenses, you can apply them to your budget. This is where you determine whether you have enough projected income to cover all your expenses.

If you have more than enough income to cover your expenses, you have a budget surplus. Knowing this, you should determine how to use additional funds best. You may, for example, move the money into a rainy day fund you can access should your actual income fall short of projections. Alternatively, you may deploy the funds to grow your business.

On the other hand, if your expenses exceed your income, you have a budget deficit. At this point, you must identify the best path forward to close the gap. Can you bring in additional funds by selling more aggressively? Can you lower your fixed or variable expenses? Would you consider selling bonds or shares of company stock to infuse the business with additional capital?

An Important Financial Statement

The person responsible for generating a budget varies depending on an organization’s nature and its budgetary goals. An entrepreneur or small business owner, for example, is likely to prepare an organizational budget on their own. Meanwhile, a larger organization may rely on a member of the accounting department to generate a budget for the entire business. Individual department heads or functional leads might also be called on to submit budget proposals for their teams.

With this in mind, anyone who aspires to start their own business or move into an organizational leadership position can benefit from learning how to prepare a budget.

Do you want to take your career to the next level? Consider enrolling in our eight-week Financial Accounting course or three-course Credential of Readiness (CORe) program to learn financial concepts that can enable you to unlock critical insights into business performance and potential. Not sure which course is right for you? Download our free flowchart .

About the Author

• Creating a Small Business Financial Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 02, 2023

Are You Retirement Ready?

Table of contents, financial plan overview.

A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.

For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.

The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.

Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.

It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.

Understanding the Basics of Financial Planning for Small Businesses

Role of financial planning in business success.

Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.

With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.

For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.

Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.

Core Components of a Financial Plan for Small Businesses

Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.

Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .

For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.

As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.

Setting Clear Small Business Financial Objectives

Identifying business's short-term and long-term financial goals.

Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.

Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.

On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.

By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.

Understanding the Difference Between Profitability and Cash Flow

Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.

It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.

In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.

For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.

Estimating Small Business Startup Costs (for New Businesses)

Fixed vs variable costs.

When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.

Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .

For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.

One-Time Expenditures vs Ongoing Expenses

Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.

They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.

For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.

By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.

Funding Sources for Small Businesses

Personal savings.

This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.

While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.

The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.

Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .

The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.

However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.

Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.

Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.

However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.

Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.

The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.

Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.

Preparing Key Financial Statements for Small Businesses

Income statement (profit & loss).

An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.

By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.

For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.

The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.

Balance Sheet

The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.

Assets include everything the business owns, from physical items like equipment to intangible assets like patents .

Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.

Equity represents the owner's stake in the business, calculated as assets minus liabilities.

This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.

In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.

Cash Flow Statement

While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.

It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.

For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.

After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.

By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.

Small Business Budgeting and Expense Management

Importance of budgeting for a small business.

Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.

For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.

Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.

For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.

Strategies for Reducing Costs and Optimizing Expenses

Bulk purchasing.

When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.

However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.

Renegotiating Vendor Contracts

Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.

Building strong relationships with vendors often paves the way for such negotiations.

Adopting Energy-Saving Measures

Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.

Embracing Technology

Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.

Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.

Streamlining Operations

Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.

Outsourcing Non-core Tasks

Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.

For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.

Cultivating a Culture of Frugality

Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.

When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.

Forecasting Small Business Revenue and Cash Flow

Techniques for predicting future sales in a small business, past sales data analysis.

Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.

This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .

Market Research

Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.

For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.

Local Trend Analysis

For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.

These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.

Customer Feedback

Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.

For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.

Moving Averages

This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.

For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.

Regression Analysis

Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.

Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.

Understanding the Cash Cycle of Business

The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.

This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.

For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.

By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.

Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.

Preparing for Seasonality and Unexpected Changes

Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.

By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.

Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.

Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.

Securing Small Business Financing and Capital

Role of debt and equity financing.

When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.

Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.

Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.

Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.

The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.

Choosing Between Different Types of Loans

A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.

With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.

Lines of Credit

Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.

Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.

As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.

Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.

Peer-To-Peer Lending

A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.

This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.

However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.

Crowdfunding and Alternative Financing Options

In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.

These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.

Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.

Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.

Small Business Tax Planning and Management

Basic tax obligations for small businesses.

Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.

Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.

In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.

There might also be sales taxes, property taxes, or special state-specific levies to consider.

Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.

Advantages of Tax Planning and Potential Deductions

Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.

For small businesses, effective tax planning can lead to significant savings.

This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.

Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.

By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.

Importance of Hiring a Tax Professional or Accountant

While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.

An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.

They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.

Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.

The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.

Regularly Reviewing and Adjusting the Small Business Financial Plan

Setting checkpoints and milestones.

Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.

Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.

Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F

or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.

Using Financial Ratios to Monitor Business Health

Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.

The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.

Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.

In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.

Pivoting Strategies Based on Financial Performance

In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.

This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.

For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.

A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.

Bottom Line

Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.

With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.

As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.

Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.

Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.

Creating a Small Business Financial Plan FAQs

What is the importance of a financial plan for small businesses.

A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.

How do forecasting revenue and understanding cash cycles aid in financial planning?

Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.

What are the core components of a financial plan for small businesses?

Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.

Why is tax planning vital for small businesses?

Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.

How often should a small business review its financial plan?

Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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• Business Budget: What is it & Why is it important?

Business Budget: What is it & Why is it important?

According to a survey conducted by Clutch , 61 percent of small businesses have not created a formal budget. Without a budget, you may not understand how your business is performing.

Creating a budget helps you understand how much money you have, how much you have spent, and how much money you will need in the future. A budget can drive important business decisions like cutting down on unwanted expenses, increasing staff, or purchasing new equipment. If you end up with insufficient money, the budget can guide you in altering your business plan or prioritizing your spending on activities.

With the right budgeting plan, you can keep your business out of debt or find ways to reduce the debt it is currently facing.  A comprehensive budget can even be used for obtaining business loans from banks or other financial institutions.

In this guide, you will learn about the importance of a business budget, the components of a good budget, and the different types of budgets.

So, what exactly is a business budget?

A business budget is a spending plan for your business based on your income and expenses. It identifies your available capital, estimates your spending, and helps you predict revenue.

A budget can help you plan your business activities and can act as a yardstick for setting up financial goals. It can help you tackle both short-term obstacles and long-term planning.

Different types of budgets

Your final budget is usually a combination of inputs from several other budgets that are prepared at a departmental level. Let’s look at the different types of budget and how they contribute to drafting a business plan.

1. Master budget

A master budget is an aggregation of lower-level budgets created by the different functional areas in an organization. It uses inputs from financial statements, the cash forecast, and the financial plan. Management teams use master budgets to plan the activities they need to achieve their business goals. In larger organizations, the senior management is responsible for creating several iterations of the master budget before it is finalized. Once it has been reviewed for the final time, funds can be allocated for specific business activities.

Smaller businesses often use spreadsheets to create their master budgets, but replacing the spreadsheets with efficient budgeting software typically reduces errors.

2. Operating budget

An operating budget shows a business’s projected revenue and the expenses associated with it for a period of time. It’s very similar to a profit and loss report. It includes fixed cost, variable cost, capital costs, and non-operating expenses. Although this budget is a high-level summary report, each line item is backed up with relevant details. This information is useful for checking whether the business is spending according to its plans.

In most organizations, the management prepares this budget at the beginning of each year. The document is updated throughout the year, either monthly or quarterly, and can be used as a forecast for consecutive years.

3. Cash budget

A cash flow budget gives you an estimate of the money that comes in or goes out of a business for a specific period in time. Organizations create cash budgets using inferences from sales forecasts and production, and by estimating the payables and receivables.

The information in this budget can help you evaluate whether you have enough liquid cash for operating, whether your money is being used productively, and whether there is and whether you are on track to earn a profit .

4. Financial budget

Businesses draft this budget to understand how much capital they’ll need and at what times for fulfilling short-term and long-term needs. It factors in assets, liabilities, and stakeholder’s equity—the important components of a balance sheet , which give you an overall idea of your business health.

5. Labor budget

For any business that is planning on hiring employees to achieve its goals, a labor budget will be important. It helps you determine the workforce you will require to achieve your goals so you can plan the payroll for all of those employees. In addition to planning regular staffing, it also helps you allocate expenses for seasonal workers.

6. Static budget

As the name suggests, this budget is an estimate of revenue and expenses that will remain fixed throughout the year. The line items in this budget can be used as goals to meet regardless of any increases or decreases in sales. Static budgets are usually prepared by nonprofits, educational institutions, or government bodies that have been allocated a fixed amount to use for their activities in each area.

Components of a budget

If you are starting a new business, the first budget you create might be a challenge, but it is a good learning experience and a good way to understand what works best for your business. The best place to start is getting to know your budget components. Initially you may need to make several assumptions to get your budget started.

1. Estimated revenue

This is the money you expect your business to make from the sale of goods and services.  There are two main components of estimated revenue: sales forecast and estimated cost of goods sold or services rendered. If your business is more than a year old, then your experience will guide you in estimating these components. If your business is new, you can check the revenue of similar local businesses and use those figures to conservatively create some estimated revenue numbers. But whether your business is new or old, it is important to stay realistic to avoid over-estimating.

2. Fixed cost

When your business pays the same amount regularly for a particular expense, that is classified as a fixed cost . Some examples of fixed costs include building rent, mortgage/utility payments, employee salaries, internet service, accounting services, and insurance premiums. Factoring these expenses into the budget is important so that you can set aside the exact amount of money required to cover these expenses. They can also be a good reference point to check for problems if your business finances aren’t going as planned.

3. Variable costs

This category includes the cost of goods or services that can fluctuate based on your business success. For example, let us assume you have a product in the market that is gaining popularity. The next thing you would like to do is manufacture more of that product. The costs of the raw materials required for production, the distribution channels used for supplying the product, and the production labor will all change when you increase production, so they will all be considered variable expenses.

4. One-time expenses

These are one-off, unexpected costs that your business might incur in any given year. Some examples of these costs include replacing broken furniture or purchasing a laptop.

Since it is difficult to predict these expenses, there is no certain way to estimate for them. But it’s wise to set aside some cash for this category to stay prepared.

5. Cash flow

This is the money that travels in and out of the business. You can get an idea of it from your previous financial records and use that information to forecast your earnings for the year you’re budgeting for. You’ll want to pay attention not only to how much money is coming in, but also when. If your business has a peak season and a dry season, knowing when your cash flow is highest will help you plan when to make large purchases or investments.

The final budget component is profit, which is a number you arrive at by subtracting your estimated cost from revenue. An increase in profit means your business is growing, which is a good sign. Once you have projected how much profit you are likely to make in a year, you’ll be able to decide how much to invest in each functional area of your organization. For example, will you use your profit to invest in advertising or marketing to drive more sales?

A budget is a road map for your business. It helps you predict cash flow, identify functional areas that need improvement, and run your operations smoothly. Successful businesses invest a lot of time and effort into creating realistic budgets, because they’re an efficient way of tracking the extent to which the business has achieved its goals. Creating a budget can get a bit overwhelming for new businesses as there are no previous figures to guide their budget estimates, but with some estimates based on the performance of competitors and an understanding of the components of a budget, you can complete your first budget and have a good road map for future budgets.

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Why Business Budget Planning Is So Important

What is a business budget, business budget planning steps, benefits of business budget planning.

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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget.

Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget.

A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change.

Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period.

A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments.

Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.

A budget is a foundational  framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:

Budget Preparation

Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of revenue and the different types of expenses. These items demand precise bookkeeping and serve as performance indicators of the overall business strategy.

An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your  master budget .

The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget . Each of these includes a number of more specific budgets.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.

Budget to Evaluate Company Performance

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:

• Static budgets : Static budgets are a type of operating budget that uses historical financial data to budget for revenue and expenses expected in the next time period. Typically used by very small businesses, these budgets require taking each line item and adding a percentage increase or decrease to it to reflect the next budget.
• Performance-based budgeting : This type of budget takes into account the inputs and outputs per unit of product or service in order to achieve maximum efficiency.
• Zero-based budgeting : A zero-based budget starts from scratch every time period and builds a new budget based on the conditions at that time. In other words, it starts from zero for each line item and uses internal and industry financial data to build the budget.
• Variance analysis : A variance-based budget is one where actual and expected values for every revenue and expense item are calculated. The results are used to try to bring the budget items back within a certain range and achieve improved efficiency

The use of one of these types of company budgets can be another tool for the financial analysis of the firm.

For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

Budget to Obtain Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.

Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away.

If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Staffing for Budgeting

Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.

If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE , a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.

Budgeting Software

Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:

• QuickBooks : One of the most user-friendly and inexpensive software programs that include budgeting.
• Budgyt : A user-friendly budget software program allowing for more than one profit and loss statement.
• PlanningMaestro by Centage : A cloud-based budgeting software program, including forecasting, for small and medium-sized businesses.

In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system . And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.

When looking for a budgeting software program, you usually want to look for these features:

• Departmentalized budgeting : Gives you the ability to create budgets by department, division, or profit center and merge them all into the master budget.
• Collaboration : Gives more than one person in your organization the ability to work on the budgetary planning process.
• Variance comparison : Gives you the ability to see actual vs. budgeted amounts on a line-by-line basis.

If a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens.

The benefits of business budget planning are many. Here are some of the most important:

• Financial health : Without a business budget, it is impossible for you to know the financial health of your company. You will have no idea if you met or exceeded your goals.
• Strategic planning : A business budget allows you to develop a strategic plan since you will know the answer to issues like whether you can expand.
• Obtain debt financing : If a small business tries to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
• Attract investors : If a business wants to attract investors in the business, those investors will not put their money into the business unless they can see a budget.
• Tax preparation : A business budget assists in the preparation of income, sales, and payroll taxes.
• Decision making : In order to make decisions about any facet of the business, you have to know how much money is allocated to that item.

Corporate Finance Institute. " Types of Budgets ." Accessed March 9, 2021.

eFinance Management. " Variance Analysis ." Accessed March 9, 2021.

CompareCamp. " Best Budgeting Software - 2021 List of Top 10 Budgeting Software Tools ." Accessed March 9, 2021.

Business and Finance Experts Column. " The Benefits of Budgeting in a Business ." Accessed March 9, 2021.

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• Financial tools and templates

Create a budget

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Why you need a budget for your business

Create your budget, monitor your budget, use your budget, understand budgeting versus forecasting.

Budgets are essential for tracking the financial health of your business. Your budget is your planned income and spending. It helps you to allocate funds for particular items and activities.

Your budget also helps you to:

• set business goals
• make good business decisions
• get finance.

Download our template to create a budget for your business.

Budget template

You need a basic bookkeeping system to keep track of your finances. Throughout the budget period, keep an eye on how you’re tracking against your budget.

Actuals – comparing actual results to budgeted amounts

Record your business’s actual income and expenses during the budget period. Calculate the difference between your budgeted amounts and your actual results.

Find out how to set up a basic bookkeeping system.

Use your budget analysis to help you make business decisions.

If you’re spending too much:

• look for ways to cut costs
• avoid spending money on anything that isn’t essential to running your business.

If you have extra funds, think about:

• ways to reduce debt
• creating a financial safety net
• growing your business.

Tip: analysing your budget will help you find seasonal patterns. You can see if decisions like changing prices or adding a new product or service are the right ones.

Your budget is your planned revenue and spending. It allows you to allocate funds. Consider preparing a budget quarterly or yearly.

Forecasts are usually more frequent, often monthly. A forecast predicts past and current trends in your financial statements. This gives you a more realistic idea of how your business is going and help you to avoid problems.

One of the most important forecasting tools for business is cash flow forecasting . It can also help you keep on top of your bills. It’s useful if you’re trying to get finance –  it shows lenders you can pay them back.

Find other free financial templates.

Check our glossary of financial terms., find out how to review your business finances., was this page helpful, thanks for sharing your feedback with us..

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Financial Budget

A budget helps an organization allocate the resources of the company to different departments and activities and manage the cash flows of the business in an effective way. There are many types of budgets. One of them is a financial budget.

First, let’s try to understand the term a bit better.

What is a Financial Budget?

Why prepare a financial budget, capital expenditure budget, budget income statement, budgeted balance sheet, financial budget plan.

A financial budget (a type of master budget ) in budgeting means predicting the income and expenses of the business on a long-term and short-term basis. Accurate cash flow projections help the business achieve its targets in the right way.

Financial budget preparation includes a detailed budget balance sheet, cash flow budget, the sources of income and expenses of the business, etc. The evaluation of incomes and expenses is done on a monthly, quarterly, half-yearly, or annual basis, depending on the organization’s suitability. It is a very powerful tool to achieve the long-term goals of any business. Importantly, it also keeps the shareholders and other members of the organization updated about the functioning of the business.

Organizations prepare a financial budget to manage the cash flows better. This budget gives the business better control and provides a more efficient planning mechanism to manage the inflows and outflows. To prepare such a budget, it is important to prepare the operating budget first. With the help of the operating budget, the organization can predict the sales and production expenses. Therefore, the organization prepares this budget only after planning the different financing activities in the operating budget.

Also Read: Types of Budget

Different Sections of a Financial Budget

As the name suggests, the capital expenditure budget relates to expenses related to plant and machinery or any capital asset of the business. This budget determines the expenses that would be incurred if an existing plant is replaced or any new machinery is bought. Factors like depreciation, cost of the plant, life of the machinery, etc., are taken into account when preparing the capital expenditure budget .

The budgeted income statement contains comparative information of actual and budgeted data. Read more about the budgeted income statement .

The budgeted balance sheet comprises many other budgets. The major component of this budget includes the production budget and its associated budgets.

Let’s take a closer look at the financial budget preparation.

The financial budget plan comprises the following steps:

• Calculate the expected inflow
• Calculate the expected outflow
• Set the targets
• Divide the expenses into different categories
• Keep track of components in the budget
• Set up the ledger

The above points give some idea of how a financial budget plan is set. Different organizations may take different factors into consideration while preparing the budget. However, the above points will form part of any budget plan.

The financial budget provides a blueprint for the business to move forward. It addresses the financial aspects of the business and checks operational efficiency. The extra expenses are cut by emphasizing cost reduction and improving the market share. The organization is well prepared to meet the long-term and short-term expenses in terms of financial budgets. A good budget helps achieve the business’s goals and objectives in the shortest possible span of time.

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Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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@media(min-width: 1024px){.css-hqxvux{max-width:100%;}} Understanding the basics of operating budgets: A beginner's guide

Components of an operating budget

The process of creating an operating budget, benefits of an operating budget, top 5 challenges in operating budget management, differences between operating budgets and capital budgets, 4 industry examples of an operating budget, best practices to follow for operating budget management, the budgeting move that will change your business forever.

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Introduction.

An operating budget serves as the financial backbone of any organization. This powerful tool guides resource allocation and also acts as a benchmark for performance evaluation and decision-making. Understanding the intricacies of operating budgets is core to business success today.

From small startups to multinational corporations, businesses of all sizes use operating budgets to navigate their fiscal year with clarity and purpose. These budgets offer a detailed projection of expected revenues and expenses, enabling companies to anticipate any new challenges, seize opportunities, and maintain a strong financial footing.

However, creating and managing a well-crafted operating budget requires a deep understanding of various financial components, collaboration across multiple departments, and the ability to adapt to changing market conditions. And not every business can do all of those things well. This article aims to provide practical insights into the implementation and management of an operating budget.

We'll explore the core components of operating budgets, dive into the creation process, and highlight the benefits every organization can reap. Additionally, we'll address common challenges in budget management and offer solutions to overcome them. You’ll walk away with a solid understanding of how operating budgets can drive your organization's financial health and contribute to long-term success.

What is an operating budget?

An operating budget is a comprehensive financial plan that outlines an organization's expected revenues and expenses for a specific period, typically one fiscal year. It serves as a detailed roadmap for managing day-to-day operations, allocating resources, and achieving short-term financial goals. This budget forecasts all anticipated income sources and regular expenditures necessary to run the business, including salaries, rent, utilities, supplies, and other operational costs.

Think of an operating budget as a financial GPS for your business. Just as a GPS helps you navigate from point A to point B, an operating budget directs your financial journey through the fiscal year. It maps out where money is expected to come from (revenues) and where it needs to go (expenses) to keep operations humming.

In the realm of financial planning, an operating budget serves several critical functions:

It acts as a financial control mechanism to keep spending in check.

It provides a benchmark for evaluating actual performance against projections.

It facilitates informed decision-making about resource allocation.

It helps identify potential cash flow issues before they become problematic.

It aligns financial activities with larger organizational goals.

An operating budget helps businesses clearly visualize their operations, proactively manage their finances, make data-driven decisions, and act with confidence and clarity.

An operating budget has several key elements that together provide a view of an organization's expected financial performance:

Revenue projections

Fixed costs.

The expenses that remain constant regardless of production or sales volume are your fixed costs, which form a stable base in the operating budget. These costs typically include rent or mortgage payments for facilities, insurance premiums, salaries for permanent staff, property taxes, and depreciation of assets. For instance, a manufacturing company might have fixed costs of $200,000 per month for factory rent, $100,000 for equipment leases, and $500,000 for administrative staff salaries. Understanding and accurately forecasting these costs is essential for determining the bare minimum revenue needed to break even and for making long-term financial decisions.

Variable costs

Variable costs fluctuate directly with production or sales volume. These expenses typically include raw materials for production, direct labor costs tied to production, sales commissions, packaging and shipping costs, and credit card processing fees. As an example, a T-shirt printing company's variable costs might include $5 for blank shirts, $2 for ink, and $1 for packaging per shirt produced. Tracking and managing variable costs is crucial for maintaining profitability as production or sales volumes change. Many organizations have employees use a corporate credit card so that they can manage and track these variable expenses, providing real-time visibility into spending and simplifying expense categorization.

Semi-variable costs

Semi-variable costs are the gray areas between fixed and variable costs, having components of both. These costs change with production or sales volume but not in direct proportion. Examples include utilities (with a base rate plus usage), overtime labor, equipment maintenance, and some marketing expenses. For instance, a restaurant might have a base rate of $1,000 per month for electricity, plus $0.10 per kilowatt-hour used. These are definitely trickier to track, but understanding the nature of semi-variable costs allows organizations to make more nuanced financial projections and decisions, particularly when considering changes in production or service levels.

These components will give organizations a clear understanding of their cost structure and revenue sources. And such a detailed view enables more accurate forecasting, helps identify areas where costs can be controlled or revenues increased, and provides a foundation for making financial decisions throughout the fiscal year.

Creating an operating budget is a comprehensive and collaborative process that involves multiple steps and stakeholders across an organization. The process typically unfolds as follows:

Start by setting clear budget objectives that align with the organization's overall strategy and financial goals. This first step provides direction for the entire budgeting process. Once these objectives are established, the finance team can delve into historical data, analyzing past financial performance to identify trends and inform projections. This retrospective analysis serves as a foundation for future estimates.

Next, the process becomes more decentralized as each department provides input on its expected expenses and, where applicable, revenue projections. This bottom-up approach ensures that those closest to day-to-day operations contribute their expertise to the budget. Simultaneously, the sales and marketing teams work on forecasting revenues, basing their projections on market analysis, historical data, and current sales pipelines.

With departmental input in hand, the finance team compiles all anticipated costs, including fixed, variable, and semi-variable expenses. This comprehensive view of expenses is then combined with revenue projections to create an initial budget draft. This draft undergoes rigorous review by management, who make adjustments to align the budget with strategic goals and financial constraints.

After necessary revisions, the final budget is presented for approval by senior management or the board of directors. Once approved, the budget is communicated to relevant stakeholders across the organization, and implementation begins.

Throughout this process, accurate data collection and analysis play a crucial role. Finance teams often leverage various data sources, including financial statements, sales reports, market research, and industry benchmarks to ensure the budget is based on the most current and relevant information available. Startup banking solutions often provide integrated financial tools that can streamline this data collection process for new businesses.

Gaining buy-in from different departments is key to creating a realistic and achievable budget. While finance oversees the entire process, sales provides revenue projections, operations estimates production costs, human resources forecasts labor expenses, and marketing outlines promotional spending. This collaborative approach not only produces a more accurate budget but also increases the likelihood of successful budget implementation and adherence throughout the fiscal year.

Here are five key benefits that organizations of all sizes stand to gain from using an operating budget:

Improved financial control

An operating budget ultimately helps organizations maintain control over their spending. By setting clear financial targets and regularly comparing actual performance against budgeted figures, companies can quickly identify and address variances. This proactive approach helps prevent overspending, ensures resources are allocated efficiently, and maintains financial stability. It enables management to make timely adjustments, preventing small issues from escalating into major problems. Moreover, an operating budget facilitates the identification and implementation of cost reduction strategies by providing a clear view of where money is being spent, enabling organizations to target areas for potential savings and efficiency improvements.

Better decision-making

With a comprehensive operating budget in place, management gains a clear picture of the organization's financial capacity and constraints. This insight is invaluable when making critical business decisions. Whether it's determining whether the company can afford to hire additional staff, invest in new equipment, or expand into new markets, the budget provides a solid baseline for these choices. It helps answer crucial questions like "Can we afford this investment?" or "How will this decision impact our bottom line?" by providing context and financial implications for each option.

Enhanced performance evaluation

An operating budget serves as a benchmark against which actual performance can be measured. It allows organizations to set specific, measurable financial goals for different departments or business units. By comparing actual results to budgeted figures, management can objectively evaluate performance, identify areas of excellence, and pinpoint where improvements are needed. This data-driven approach to performance evaluation promotes accountability and helps in setting realistic targets for future periods.

Increased coordination

Corporate alignment is another benefit of an operating budget because the process fosters communication and collaboration across different departments. As various teams contribute their input and work toward common financial goals, it enhances interdepartmental coordination. This improved alignment can lead to more efficient operations, better resource allocation, and a shared sense of purpose.

Improved cash flow management

By forecasting both income and expenses, an operating budget helps organizations anticipate their cash flow needs throughout the year. This foresight is crucial for maintaining adequate liquidity, avoiding cash crunches, and deciding on the timing of major expenses or investments. Strategic cash flow management , guided by the operating budget, can improve business cash flow by reducing the need for short-term borrowing, potentially lowering interest expenses and enhancing the overall health of the organization.

These benefits collectively contribute to a culture of financial discipline and serve as a north star for organizations to navigate challenges, seize opportunities, and achieve their strategic objectives. An operating budget is not just a financial tool; it's a strategic asset that provides the foundation for informed decision-making, performance improvement, and long-term success.

While operating budgets are invaluable tools for financial planning and control, there are several challenges that can derail their success:

1. Inaccurate forecasting

Even with careful analysis and historical data, predicting future revenues and expenses with precision remains a complex task, often leading to discrepancies between budgeted and actual figures. Volatile market conditions, unexpected economic shifts, or internal changes within the organization are primary drivers of inaccurate forecasts, which can significantly impact liquidity management and potentially lead to cash shortages or missed investment opportunities.

Solution: Implement rolling forecasts and leverage advanced analytics tools. Regularly update projections based on the most recent data and market trends. Use statistical models and machine learning algorithms to improve prediction accuracy. Conduct sensitivity analysis to understand the impact of various factors on your models.

2. Budget inflexibility

Once established, budgets can become rigid frameworks that struggle to accommodate unexpected changes in the business environment. A lack of adaptability can lead to outdated or irrelevant financial plans, especially in rapidly evolving industries or during times of economic uncertainty.

Solution: Adopt a flexible budgeting approach. Use scenario planning to prepare for different outcomes. Incorporate contingency funds into the budget to handle unexpected changes. Implement a process for periodic budget reviews and adjustments to ensure the budget remains relevant and aligned with current business conditions.

3. Time-consuming processes

The budget creation process itself can be lengthy and resource-intensive, potentially diverting attention from other important tasks and creating resistance among employees who view it as a burdensome exercise.

Solution: Transform your budgeting process by embracing advanced budgeting and accounting automation software . Such tools can handle the heavy lifting of data collection and routine tasks, saving time and improving accuracy. Set up standardized templates for each department and implement a centralized system that integrates with your automated accounting tools, enabling real-time updates and collaboration. Also, consider adopting a driver-based budgeting approach to focus on key business factors rather than every line item. This combination of automation and strategic thinking can turn budgeting from a time-consuming chore into an efficient, insights-driven process that delivers more accurate and useful financial plans.

4. Balancing short-term and long-term goals

Another organizational challenge is rationalizing short-term budget adherence with long-term strategic goals. Strict budget constraints might lead managers to make decisions that meet immediate financial targets but could be detrimental to the company's long-term growth and competitiveness. Finding this balance often involves identifying ways to improve operational efficiency to meet short-term targets without compromising long-term strategic investments.

Solution: Align the budgeting process with the company's strategic planning. Incorporate both short-term targets and long-term strategic objectives into the budget. Use balanced scorecards or similar tools to ensure a holistic view of performance that includes both financial and non-financial metrics. Educate managers on the importance of balancing immediate budget targets with long-term value creation.

5. Overlooking non-financial factors

Focusing solely on financial metrics can lead to overlooking other harder-to-measure factors for business success, such as customer satisfaction or employee morale.

Solution: Integrate non-financial key performance indicators (KPIs) into the budgeting process. These might include customer satisfaction scores, employee engagement metrics, or sustainability targets. Develop a comprehensive performance measurement process that weighs financial and non-financial factors. Encourage cross-functional input during the budgeting process to ensure all aspects of the business are considered.

While both operating budgets and capital budgets are important planning tools, they serve distinct purposes and differ in several key aspects. Operating budgets focus on short-term, day-to-day financial activities, typically covering one fiscal year and including recurring expenses like salaries, rent, and utilities. They directly impact the income statement and are funded through regular revenue streams. In contrast, capital budgets have a long-term perspective, often spanning several years, and plan for significant investments in assets or projects that will contribute to the company's future growth.

Capital budgets often cover large, one-time expenditures such as purchasing buildings or implementing major software initiatives. These items primarily affect the balance sheet, with expenses capitalized and depreciated over time. Due to the substantial funds needed, capital budgets often require special financing arrangements and typically involve a higher risk profile compared to operating budgets.

The creation and approval processes for these budgets also vary. Operating budgets are usually created annually with frequent updates, while capital budgets may align with longer-term strategic planning cycles. While senior management typically approves operating budgets, capital budgets often require board approval due to their significant financial commitments and long-term implications.

In a nutshell, operating budgets ensure smooth day-to-day operations and short-term financial health, while capital budgets drive long-term growth and strategic positioning.

Those leaders who can skillfully balance the immediate needs addressed in the operating budget with the future-oriented investments outlined in the capital budget will gain a strategic advantage.

Operating budgets are as diverse as the businesses they serve, reflecting the unique financial position of every industry. The following four examples illustrate how different types of organizations structure their operating budgets, highlighting the varying revenue sources, cost structures, and financial priorities across retail, manufacturing, software, and food service sectors.

1. Retail store operating budget

A retail store's operating budget would typically include projected sales revenue from various product categories, such as clothing, accessories, and home goods. Fixed costs would encompass rent for the store location, insurance premiums, and base salaries for full-time staff. Variable costs might include the cost of goods sold, sales commissions for employees, and packaging materials. Semi-variable costs could cover utilities (with a base rate plus usage) and wages for part-time staff that fluctuate by season and with store traffic. The budget might also include marketing expenses for local advertising and seasonal promotions.

2. Manufacturing company operating budget

For a manufacturing company, the operating budget would start with projected sales of manufactured goods, possibly broken down by product lines or customer segments. Fixed costs would include equipment leases, property taxes for the factory, and salaries for management and core production staff. Variable costs would cover raw materials, direct labor tied to production volume, and shipping costs. Semi-variable costs might include machine maintenance (with regular servicing plus usage-based repairs) and energy costs for running the production line. The budget would also factor in quality-control expenses and inventory management costs.

3. Software as a Service (SaaS) company operating budget

A SaaS company's operating budget would primarily focus on subscription revenue projections, possibly including different tiers of service and expected customer churn rates. Fixed costs would cover office rent, core development team salaries, and software licenses for internal use. Variable costs might include cloud hosting fees (think AWS services) that scale with user activity and customer support staff wages. Semi-variable costs could encompass marketing expenses (with a base budget plus performance-based spending) and sales team compensation (base salary plus commissions). The budget would also include expenses for continuous product development and cybersecurity protections.

4. Restaurant operating budget

A restaurant's operating budget would begin with projected food and beverage sales, possibly broken down by meal times or menu categories. Fixed costs would include rent for the restaurant space, kitchen equipment leases, and salaries for management and key kitchen staff. Variable costs would cover food ingredients, hourly wages for servers, and disposable items like napkins and takeout containers. Semi-variable costs might include utilities (with higher usage during peak hours) and maintenance for kitchen equipment. The budget would also account for marketing expenses, such as local advertising and menu printing, as well as licensing fees and regular health inspections.

These examples illustrate how operating budgets can be tailored to meet the specific needs and challenges of different industries. Despite their differences, each budget serves as a crucial financial roadmap, helping businesses manage resources effectively, control costs, and ultimately drive profitability in their respective sectors.

Now that you have an idea of how to build an operating budget, it’s time to operationalize it. The following best practices offer a roadmap for creating, implementing, and maintaining an operating budget that can withstand evolving business conditions while driving strategic objectives.

Use historical data wisely

While past performance provides valuable insights, avoid over-relying on historical data. Instead, combine historical trends with forward-looking analysis. Consider market trends, economic forecasts, planned strategic initiatives, and the performance of liquid assets when projecting future performance. Regularly update your historical data analysis to reflect the most recent patterns and changes in your business environment.

Involve key stakeholders

Engage department heads, managers, and frontline staff in the budgeting process. Their insights can provide realistic input and increase organizational buy-in. Conduct budget workshops or planning sessions to gather diverse perspectives. Clearly communicate the budget's importance and how it aligns with overall company goals to foster a sense of ownership among all participants.

Implement zero-based budgeting periodically

Instead of always building on the previous year's budget, occasionally start from zero. This approach challenges assumptions and can identify unnecessary expenses. Conduct a thorough review of all expenses, justifying each line item. This process can uncover inefficiencies, eliminate redundant costs, promote resource optimization , and reallocate resources to areas with the highest return on investment.

Conduct regular reviews

Don't treat the budget as a static document. Review it regularly (monthly or quarterly) and be prepared to make adjustments based on actual performance. Establish a formal review process that includes variance analysis and action planning. Use these reviews as opportunities to refine cash flow forecasts and realign resources as needed.

Use variance analysis

Speaking of variance analysis, you’ll want to regularly compare actual results to budgeted figures. Investigate any standout variances to understand their causes and take corrective action if necessary. Develop a process for tracking and reporting variances in real time. Train managers to interpret variance reports and take appropriate actions based on the findings.

Leverage technology

Budgeting and forecasting software will streamline the process, improve accuracy, and enable real-time updates and analysis. Invest in integrated financial planning software that can pull data from various sources automatically. Explore AI and machine learning capabilities to enhance forecasting accuracy and identify trends or anomalies in financial data. Incorporating spend management software into your budgeting process can provide insights into spending patterns, automate expense reports , and help ensure adherence to budget constraints

Align with strategic goals

Ensure the operating budget reflects and supports the organization's overall strategic objectives. Each line item should contribute to achieving these goals. Create clear links between budget allocations and strategic initiatives. Use the budget as a tool to communicate and reinforce the company's strategic priorities across all levels of the organization.

These are just a few best practices that can help companies create more accurate, useful operating budgets that drive better financial decision-making and performance. Remember, great budgeting is an ongoing process of planning, execution, monitoring, and adjustment, always aligned with your strategic direction and responsive to changing business conditions.

Operating budgets are essential tools for financial management, offering organizations a clear path to navigate their fiscal landscape. They provide a structured approach to planning, controlling, and evaluating performance, enabling businesses large and small to make informed decisions and adapt to changing market conditions.

In an era where technology continues to reshape business practices, it's no surprise that budgeting processes are also evolving. Many organizations are now turning to advanced software solutions to uplevel their financial management. One such tool making waves in this space is Brex's spend management and budget management software . This software addresses many of the challenges we've discussed, offering features like real-time spending visibility, automated expense categorization, and customizable budgets. These capabilities can automate much of the workload and help you create, monitor, and adjust your operating budgets with agility.

If you're intrigued by the potential of such tools to enhance your budgeting process, it might be worth taking a closer look. Consider scheduling a demo with Brex to see their platform in action and understand how it could align with your specific needs and goals.

After all, the best operating budget is one that evolves with your business, leveraging sound financial principles and cutting-edge technology. By combining the insights from this article with powerful tools like those offered by Brex, you can turn your operating budget into a true strategic asset, driving your organization toward greater financial health and success.

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Top Excel Budget Templates (Free Downloads Included!)

Table of Contents

Why Use an Excel Budget Template?

Step 1: choose the right template, step 2: set up the template, step 3: input your data, step 4: track and update regularly, step 5: analyze your finances, step 6: adjust as needed, 1. clarity and control, 2. smarter spending, 3. financial goal achievement, 4. improved savings habits, 5. reduced stress, step 1: set up your spreadsheet, step 2: format your template, step 3: use formulas for calculations, step 4: customize to your needs.

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Managing your finances effectively is crucial for achieving financial stability and reaching your financial goals. Excel budget templates are powerful tools that can help you track your income, expenses, and savings with ease. Explore our wide range of Free Excel Budget Templates is here to help! Whether you need to manage your personal finances, business budget, or plan for an event, we’ve got you covered. Choose from our variety of templates, including Annual, Business, Event, Family, Monthly, Personal, Project, Simple, Student, and Weekly Budget templates. Simplify your budgeting process and stay on top of your financial goals with our easy-to-use, customizable templates. Download your Free Excel template today and unlock a path to financial freedom!

Simple Budget Template

The simple budget template is designed for simplicity and ease of use, making it perfect for beginners. This easy budget template features a basic layout with separate sections for income and expenses, helping you manage your finances without any advanced Excel skills. By providing automatic calculations for total income, total expenses, and remaining balance, this beginner budget template allows you to gain a clear snapshot of your financial status at a glance. Ideal for individuals or small families, this basic budget Excel tool helps identify areas where you can cut back on spending.

Download Simple Budget Template

Download Simple Excel Budget Template

• Basic layout with separate income and expense sections.
• Automatic calculation of total income, total expenses, and remaining balance.
• Customizable categories for different types of expenses (e.g., utilities, groceries, entertainment).
• Easy to set up and use without any advanced Excel skills.
• Provides a clear snapshot of your financial status at a glance.
• Helps identify areas where you can cut back on spending.

Usage: Ideal for individuals or small families who want a straightforward way to track their monthly finances.

Weekly Budget Template

For detailed short-term financial tracking, the weekly budget template is the perfect tool. This short-term budget planner helps you monitor your income and expenses on a weekly basis, providing a clear picture of your financial status. With customizable categories for detailed tracking and weekly summaries, this weekly expense tracker allows you to maintain consistent financial monitoring. Ideal for individuals or families, this weekly financial planning template helps you set and achieve weekly financial goals. Whether you prefer weekly budgeting or need to manage short-term finances, this detailed weekly budget template is essential.

Download Weekly Budget Tracker

Download Weekly Budget Template

• Sections for weekly income and expenses.
• Customizable categories for detailed tracking.
• Weekly summaries to monitor spending patterns.
• Helps maintain detailed short-term financial tracking.
• Provides a clear overview of weekly financial status.
• Useful for setting and achieving weekly financial goals.

Usage: Suitable for individuals or families who prefer to keep track of their finances on a weekly basis.

Monthly Budget Planner

The monthly budget planner is an excellent tool for detailed financial tracking on a monthly basis. This monthly expense tracker features separate sections for income, expenses, and savings, along with graphical representations of spending categories to help you visualize where your money goes. With a monthly summary that compares total income and expenses to previous months, this Excel monthly budget template helps you maintain consistent financial tracking. Suitable for anyone looking to monitor their spending and savings month by month, this budget spreadsheet is a must-have for monthly financial planning.

Download Monthly Budget Free Template

Download Monthly Budget Plan Template

• Separate sections for income, expenses, and savings.
• Graphical representations of spending categories to visualize where your money goes.
• Monthly summary of total income and expenses with comparison to previous months.
• Helps maintain consistent financial tracking month over month.
• Easy to spot trends in spending and savings.
• Useful for setting and monitoring monthly financial goals.

Usage: Suitable for anyone who needs to monitor their spending and savings month by month.

Annual Budget Template

For those seeking long-term financial planning, the annual budget template is the perfect tool. This yearly budget planner offers a comprehensive view of your income and expenses over an entire year. With monthly breakdowns for detailed tracking and forecasting features for future planning, this long-term budget Excel template helps you set and achieve annual financial goals. Ideal for identifying yearly financial trends and patterns, this yearly expense tracker provides a clear overview of your financial status. This annual financial planning template is essential for anyone looking to manage their finances over a longer period.

Download Yearly Budget  Planner

Download Yearly Budget Plan Template

• Comprehensive annual view of income and expenses.
• Monthly breakdowns for detailed tracking.
• Forecasting features for future planning.
• Allows for long-term financial planning and tracking.
• Helps identify yearly financial trends and patterns.
• Useful for setting annual financial goals and budgets.

Usage: Best for those who want to keep an eye on their finances over the course of a year, including recurring expenses and long-term savings goals.

Personal Budget Template

The personal budget template is a customizable tool designed to fit your unique financial situation. This individual budget planner provides detailed sections for various types of income and expenses, allowing for personalized financial management. With monthly and yearly summary sheets, this personal expense tracker helps maintain a detailed record of your finances. By offering customization based on individual financial goals and needs, this detailed budget template provides a clear overview of your financial status. Perfect for anyone looking to manage their personal income, expenses, and savings goals efficiently.

Download Personal Budget Excel Template

Download Personal Budget Template

• Detailed sections for different types of income and expenses.
• Customizable categories to fit personal needs.
• Monthly and yearly summary sheets.
• Helps maintain a detailed record of your personal finances.
• Allows for customization based on individual financial goals and needs.
• Provides a clear overview of monthly and yearly financial status.

Usage: Perfect for individuals who want to keep track of their own income, expenses, and savings goals.

Family Budget Template

The family budget template is tailored to help households manage their shared finances effectively. This household budget planner includes special categories for family-related expenses such as childcare and groceries, making it an ideal tool for family financial planning. With sections for household income and expenses, this family expense tracker provides a clear overview of the family’s financial status. Graphical summaries help visualize spending patterns, making it easier to set and achieve family financial goals. This shared budget Excel template is perfect for families looking to manage their finances collectively.

Download Free Family Budget Tracker

Download Family Budget Template

• Sections for household income and expenses.
• Special categories for family-related expenses (e.g., childcare, groceries).
• Graphical summaries to visualize spending patterns.
• Helps families manage and track shared expenses.
• Provides a clear overview of household financial status.
• Useful for setting and achieving family financial goals.

Usage: Ideal for families looking to manage their finances collectively and ensure all household expenses are covered.

Student Budget Template

The student budget template is specifically designed to help students manage their limited finances effectively. This budget template for students includes sections for student income, such as part-time jobs and allowances, and expenses like tuition and books. With customizable categories, this student expense tracker fits the unique needs of students. Monthly summaries help track spending and savings, making this student financial planning template an excellent tool for maintaining a clear overview of financial status. Perfect for students, this customizable student budget template helps manage finances and stay within budget.

Download Student Budget Manager

Download Student Budget Template

• Sections for student income (e.g., part-time jobs, allowances) and expenses (e.g., tuition, books).
• Customizable categories to fit student needs.
• Monthly summaries to track spending and savings.
• Helps students manage and track their limited finances.
• Provides a clear overview of student financial status.
• Useful for setting and achieving student financial goals.

Usage: Perfect for students who need to manage their finances and stay within their budget.

Event Budget Template

Planning and managing the finances of events is made easy with the event budget template. This customizable event budget template is suitable for various types of events, ensuring you stay within your budget for any occasion. Detailed sections for event-related income and expenses, along with customizable categories, make this event expense tracker an essential tool for event financial planning. By providing summary sections to monitor your budget, this budget template for events helps you efficiently manage event-specific expenses. Ideal for weddings, corporate gatherings, and other events.

Download Event Budget Planner

Download Event Budget Template

• Detailed sections for event-related income and expenses.
• Customizable categories for different types of events.
• Summary sections to ensure you stay within your budget.
• Helps manage event-specific expenses efficiently.
• Provides a clear overview of event finances.
• Useful for staying within budget for various types of events.

Usage: Great for anyone planning an event, from weddings to corporate gatherings, to keep track of all related expenses.

Project Budget Template

The project budget template is designed to help manage the financial aspects of projects, big or small. This customizable project budget template includes sections for project income and expenses, ensuring your project stays on budget. With tracking and summary features, this project expense tracker provides a clear overview of project costs. Ideal for project managers or freelancers, this project financial planning template helps keep a close eye on project-specific finances. Whether you are handling a small project or a large initiative, this budget template for projects is an invaluable tool.

Download Project Budget Manager

Download Project Budget Template Excel

• Sections for project income and expenses.
• Customizable to fit different types of projects.
• Tracking and summary features to monitor project budget.
• Helps manage project-specific finances efficiently.
• Provides a clear overview of project costs.
• Useful for ensuring projects stay within budget.

Usage: Ideal for project managers or freelancers who need to keep a close eye on project costs.

Business Budget Template

Designed specifically for small businesses, the business budget template helps manage business finances effectively. This small business budget planner includes sections for business income, expenses, and profits, making it an excellent tool for business financial planning. Customizable to fit various business needs, this business expense tracker provides detailed financial summaries and forecasts. Ideal for small business owners, this budget template for businesses offers a comprehensive view of the business’s financial status. With this tool, managing and tracking business finances becomes efficient and straightforward.

Download Business Budget Template

• Sections for business income, expenses, and profits.
• Customizable to fit various business needs.
• Detailed financial summaries and forecasts.
• Helps manage and track business finances efficiently.
• Provides a clear overview of business financial status.
• Useful for setting and achieving business financial goals.

Usage: Best for small business owners who need a comprehensive tool to manage their business finances.

Using an Excel budget template can make managing your finances much simpler and more efficient. Whether you’re an individual, a family, a student, or a business owner, there’s a template out there that can meet your needs. Download one of these top templates and start taking control of your finances today!

Imagine navigating a road trip without a map. Budgeting is similar. Without a clear plan, your finances become a confusing, potentially expensive journey. A budget template acts as your GPS, providing structure and direction. Excel budget templates offer numerous advantages for managing your finances:

• Ease of Use: Excel’s user-friendly interface makes it easy to input and organize financial data.
• Customization: Templates can be tailored to fit your unique financial situation.
• Automation: Excel’s formulas and functions automate calculations, saving time and reducing errors.
• Visualization: Charts and graphs help visualize your financial data, making it easier to identify trends and make informed decisions.
• Accessibility: Excel is widely available and compatible with various devices, allowing you to access your budget anytime, anywhere.
• Formulas Save Time: Automate calculations for a faster and more accurate budgeting experience.
• Data Visualization: Charts and graphs make your spending trends clear and easy to understand.
• Organization Powerhouse: Excel keeps your finances neatly organized in one place.

How to Use Excel Budget Templates

Using Excel budget templates can significantly simplify the process of managing your finances. Whether you’re tracking personal expenses, planning an event, or managing a business, these templates provide a structured way to monitor income and expenses. Here’s a step-by-step guide on how to use Excel budget templates effectively:

Identify Your Needs: Determine what type of budgeting you need (e.g., personal, family, event, business). Download the Template: Visit a trusted source like Microsoft Office Templates or a reputable financial website to download the template that suits your needs.

Open the Template: Open the downloaded Excel budget template on your computer. Customize Categories: Adjust the income and expense categories to match your specific financial situation. Most templates allow you to add, remove, or rename categories.

Enter Income: Start by entering all your income sources. This could include salary, freelance work, investments, or any other sources of income. List Expenses: Input your expenses in the corresponding categories. Be as detailed as possible, including both fixed expenses (rent, utilities) and variable expenses (groceries, entertainment).

Monitor Regularly: Make it a habit to update the template regularly with new income and expenses. This could be done daily, weekly, or monthly, depending on your preference. Review Summaries: Use the summary sections to review your financial status. Look at the total income, total expenses, and the remaining balance to understand your financial health.

Identify Trends: Use the graphical representations and summary sections to identify spending patterns and trends. This can help you make informed decisions about where to cut costs or how to allocate more funds to savings. Set Goals: Based on your analysis, set realistic financial goals. This could be saving a certain amount each month, reducing discretionary spending, or planning for a major purchase.

Modify Categories: If you find that your categories are too broad or too narrow, adjust them to better reflect your financial activities. Revisit Goals: Regularly revisit your financial goals and adjust them based on your current financial situation. If you achieve a goal, set a new one to keep yourself motivated.

Importance of Budgeting

Budgeting is a crucial aspect of financial management that can significantly impact your financial well-being. It involves planning and tracking your income and expenses to ensure you are living within your means and working towards your financial goals. Here are some key reasons why budgeting is essential:

Gain Insight: Budgeting gives you a clear picture of where your money is going. It clarifies your income and expenses, giving you control over your money. By tracking your expenses and income, you can see exactly how much you are spending and on what, allowing you to make informed financial decisions.

Avoid Overspending: A budget helps you avoid overspending by keeping your expenses in check. By setting limits for different categories, you can prevent unnecessary expenditures and ensure you have enough funds for essential needs.

Prioritize Needs Over Wants: With a budget, you can prioritize your needs over wants. This helps curb impulse purchases and avoid unnecessary debt. By allocating funds to essential expenses first, you can ensure that your basic needs are met before spending on discretionary items.

Avoid Debt: Budgeting helps you live within your means, reducing the likelihood of relying on credit cards or loans for day-to-day expenses. This proactive approach prevents the accumulation of new debt and promotes long-term financial stability.

Set and Reach Goals: Whether you’re saving for a vacation, a new car, a home, or retirement, a budget helps you set realistic financial goals and create a plan to achieve them. It helps you track progress towards these goals, ensuring you make steady progress.

Emergency Fund: Budgeting helps you build an emergency fund, providing a financial cushion for unexpected expenses like medical bills, car repairs, or job loss. Having this safety net can reduce stress and prevent you from falling into debt.

Consistent Savings: Budgeting enables you to set aside money regularly for savings. A budget ensures consistent allocation towards your savings goals. By treating savings as a fixed expense, you can ensure consistent contributions to your savings account, helping you build wealth over time.

Long-term Planning: A budget helps you plan for long-term financial goals such as retirement, education, or major purchases. It allows you to allocate funds strategically and work towards these goals systematically.

Peace of Mind: Knowing that you have a plan for your finances can significantly reduce financial stress. A budget provides clarity and structure, helping you feel more in control of your financial situation. Knowing every penny’s purpose brings peace of mind.

Preparedness: Being prepared for both regular and unexpected expenses can alleviate anxiety. Budgeting ensures you are financially prepared for various scenarios, providing peace of mind and stability.

How to Create an Excel Budget Template

Creating an Excel budget template is straightforward. Follow these steps to build a customized template that suits your financial needs:

Open a new spreadsheet in Excel. Title your sheet “Excel Budget Template” and create the following columns:

• Date: The date of the transaction.
• Category: The type of income or expense (e.g., Salary, Groceries, Rent).
• Description: A brief description of the transaction.
• Budgeted Amount: The planned amount for each category.
• Actual Amount: The actual amount spent or received.
• Difference: The difference between the budgeted and actual amounts.
• Notes: Any additional notes or comments.

• Difference: =D2-E2
• Total Income: = SUM (D2:Dn) for all income rows
• Total Expenses: =SUM(E2:En) for all expense rows
• Net Total: =Total Income – Total Expenses

Adjust the categories and descriptions based on your financial situation. Add any specific items or recurring expenses that are unique to your budget.

Tips for Effective Budgeting with Excel

• Be Consistent: Update your budget regularly to ensure accuracy.
• Review Regularly: Analyze your budget at the end of each month to identify trends.
• Adjust as Needed: Modify your budget based on actual expenses and income.
• Use Conditional Formatting: Highlight important data and trends with Excel’s conditional formatting features.
• Backup Your Data: Regularly save and backup your Excel files to prevent data loss.

Using an Excel budget template is a powerful way to take control of your finances. With the ability to customize, automate, and visualize your financial data, Excel makes budgeting easier and more effective. Download our free templates above and start managing your finances today.

Recommended articles:

• ProjectManager.com: How to Make a Project Budget?
• Income and Expenses Tracking Templates : Check our templates for tracking Income and Expenses
• Smartsheet.com: Free Budget Templates

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You can get the unlocked versions of our templates here: Analysistabs .org

WOW! Fantastic budget template! It’s very user-friendly. Made managing my finances much simpler. Highly recommend to anyone looking for an efficient budgeting solution.

Thank you for your feedback!

This Excel Budget Template is a game-changer! Super intuitive and helpful for financial management

Thank you so much for your kind words! I’m thrilled to hear that the Excel Budget Template has been so helpful for your financial management. If there are any specific features you particularly enjoy or if there’s anything else you’d like to see in future templates, please let me know. Your feedback is invaluable!

Just what I needed! This budget template simplifies complex financial tasks. Great job!

Thanks for the kind words! I’m glad the template is helpful. Let me know if there’s anything else you need!

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Creating an Effective Project Budget Plan: A Comprehensive Guide

• Updated on August 19, 2024

Project managers often find themselves caught in a paradox: the budget is simultaneously the most crucial and the most elusive aspect of project planning . While we’re taught to meticulously craft Gantt charts and risk registers, the art of budget planning often remains shrouded in mystery, relegated to finance departments, or treated as a necessary evil.

But here’s a truth seldom discussed in project management circles, your budget isn’t just a financial document—it’s a strategic roadmap that can make or break your project’s success. Imagine a budget that doesn’t just constrain but empowers—a living document that evolves with your project, anticipates challenges, and unlocks opportunities.

In this guide, we’ll delve deep into the art and science of creating a project budget plan that goes beyond basic arithmetic. We’ll explore how to craft a budget that not only accounts for costs but also aligns with your project’s strategic goals, adapts to changing circumstances, and provides actionable insights throughout the project lifecycle.

Whether you’re managing a traditional waterfall project or navigating the complexities of an agile environment, mastering the nuances of budget planning will elevate your project management skills to new heights. 

Understanding Project Budget Plans

A project budget is not just a ledger of costs and revenues; it’s a strategic tool that aligns your financial resources with project goals. It guides project execution, facilitates stakeholder communication, measures performance, and manages risks. However, many project managers treat the budget as a static document, failing to adapt it to changing circumstances. A truly effective budget plan should be as agile as the project itself, evolving while maintaining fiscal discipline.

A comprehensive project budget includes direct costs like labor, materials, and subcontractor fees, along with indirect costs such as overhead and compliance fees. Contingency reserves, cash flow projections, and a cost baseline are also essential components. Often overlooked are opportunity costs and value-added metrics, which are increasingly important as projects are expected to deliver strategic value, not just stay within budget.

Creating an Effective Project Budget Plan

Building a comprehensive project budget is a critical yet challenging aspect of project management. There are many essential components to include, such as direct and indirect costs, fixed and variable costs, labor and materials, travel, equipment and space, licenses, and any other factors that may impact project expenses.

To create an effective project budget plan, a multifaceted approach is required. Before diving into the numbers, it’s crucial to define the project’s scope and objectives clearly. This involves conducting a value stream mapping exercise, performing a stakeholder value analysis, and implementing a scope-to-budget matrix to ensure alignment between the budget and the project’s strategic goals.

Next, identifying all potential costs is key to creating a comprehensive budget. Utilizing AI-powered cost prediction tools, holding cross-functional cost identification workshops, and developing a cost risk register can help uncover hidden or non-obvious expenses. Accurately estimating resource requirements, through methods like parametric modeling and skills-based resource allocation, is also essential.

Leveraging historical data and lessons learned from past projects can provide a valuable starting point for building the budget. Tapping into the expertise of mentors, project managers, and subject matter experts can also help project teams stay on track and avoid common pitfalls. Proactively managing risks and contingencies is another crucial step. By implementing Monte Carlo simulations, a tiered contingency system, and a risk-adjusted budget, project managers can take a more strategic approach to budget planning and control.

Finally, establishing a dynamic timeline, using techniques like rolling wave planning and milestone-based budget gates, can help maintain budget flexibility and visibility throughout the project lifecycle. Integrating real-time budget tracking and reporting capabilities can further enhance the project team’s ability to monitor and control the budget effectively.

Best Methods for Project Budget Estimation

Estimation is where art meets science in project budgeting. Let’s explore some advanced techniques that go beyond traditional approaches.

1. Top-Down Budgeting

Top-down budgeting starts with an overall budget figure and breaks it down into components. This approach allows project managers to leverage machine learning algorithms to refine historical comparisons through analogous estimation. Additionally, implementing a strategic allocation model can help distribute the budget based on organizational priorities. To further enhance this method, project managers can develop a cascading budget framework that enables autonomous team-level budgeting within the overall constraints.

2. Bottom-Up Budgeting

In contrast to the top-down approach, bottom-up budgeting builds the budget from individual components. This method utilizes activity-based costing to accurately assign costs to specific project activities. By implementing a collaborative estimation platform, project teams can input and justify their budget needs, ensuring transparency and buy-in. To account for uncertainties in individual cost components, project managers can employ stochastic estimation techniques.

3. Parametric Estimating

Parametric estimating uses statistical relationships between historical data and variables to generate budget projections. This technique requires project managers to develop custom parametric models tailored to their organization’s unique project characteristics. By implementing machine learning algorithms, these models can be continuously refined and improved to enhance the accuracy of the estimates. To make this process more efficient, project managers can create a parametric estimation dashboard in NimbleWork, a platform that provides quick, data-driven budget projections.

4. Three-Point Estimating 

Three-point estimating considers optimistic, pessimistic, and most likely scenarios to provide a more comprehensive budget projection. This approach enhances the traditional PERT (Program Evaluation and Review Technique) estimates by incorporating risk-weighted scenarios. Additionally, by using Monte Carlo simulations, project managers can generate probability distributions for budget outcomes, enabling them to make informed decisions. To ensure the model remains dynamic, project managers should implement a three-point estimation model that updates in real time as project conditions change.

Common Pitfalls in Project Budget Planning

Even the most experienced project managers can fall prey to budget planning pitfalls. By understanding these common mistakes, you can fortify your budgeting process and ensure more accurate, effective financial management. 

1. Underestimating Scope Creep 

Scope creep is a silent budget killer, often lurking beneath the surface of seemingly innocuous change requests. The pitfall lies in failing to account for the cumulative impact of minor scope changes. To avoid this, implement a change impact analysis tool that automatically calculates the budgetary effect of each scope modification. Additionally, create a ‘scope bank’ where additions to scope must be balanced by reductions elsewhere.

2. Neglecting Hidden Costs

Many budgets fall short because they focus solely on obvious, direct costs while overlooking less apparent expenses. Ignoring costs like team training, software licenses, or compliance requirements. Develop a comprehensive cost checklist that includes often-forgotten items and utilize AI-powered cost discovery tools to identify potential hidden expenses based on project characteristics.

3. Overreliance on Historical Data

While historical data is valuable, relying too heavily on past figures can lead to inaccurate estimates, especially in a rapidly changing business environment. Applying outdated cost structures to new projects without considering technological or market changes is a common mistake. Instead, implement a ‘future-proofing factor’ in your estimation process that accounts for anticipated changes. Utilize trend analysis and predictive modeling to adjust historical data for current and future projects.

4. Inadequate Risk Quantification

Generic contingencies often fail to address specific risks. Instead, create a risk-adjusted budget model that links particular risks to corresponding budget items. Developing a risk-adjusted budget model that ties specific risks to budget line items and using probabilistic budgeting can provide a more realistic range of budget scenarios based on potential risk events. 

5. Ignoring the Time Value of Money 

For longer projects, failing to account for inflation, currency fluctuations, or opportunity costs can distort budget accuracy. Creating static budgets that don’t consider these financial changes over time is a significant pitfall. To address this, implement a time-phased budgeting approach that factors in projected financial changes. Utilizing Net Present Value (NPV) calculations for budget items can also account for the time value of money, ensuring a more accurate financial plan.

6. Siloed Budgeting Process 

Creating a budget in isolation from other project processes and stakeholders can lead to misalignment and unrealistic expectations. Developing the budget without input from key team members or stakeholders can lead to confusion and chaos. Using a collaborative budgeting platform where team members can contribute insights and estimates, and implement regular budget review sessions that align financial planning with project strategy and stakeholder expectations are crucial for maintaining budget integrity.

Monitoring and Controlling the Project Budget

Creating a budget is just the beginning; the real challenge lies in effectively monitoring and controlling it throughout the project lifecycle. Real-time budget tracking, predictive analytics, and rolling wave budgeting are essential tools for maintaining control, replacing the outdated approach of monthly reports. 

☑ Real-Time Budget Tracking : Utilize dashboards for instant visibility and set up automated alerts for variances. This proactive approach helps address issues before they escalate.

☑ Predictive Analytics : Anticipate budget issues by analyzing spending patterns and project progress. Predictive models simulate the impact of decisions on the budget, enabling informed choices.

☑ Value-Driven Budgeting : Focus on the value delivered rather than just the cost. Develop a system to track value realization and use metrics to ensure that spending is justified by the value created.

☑ Proactive Budget Reviews : Schedule regular budget health checks to analyze trends and address issues. A budget health scorecard can assess financial performance and control.

Project budget planning has evolved into a crucial strategic element in project management, beyond just cost estimation and tracking. It’s now about crafting a flexible financial framework that aligns with project goals, anticipates risks, and drives value.

The techniques and strategies we’ve covered, from AI-powered cost prediction to value-based budget control, represent the forefront of project financial management. By adopting these methods, project managers can turn budgets from mere constraints into opportunities for success.

To fully harness these advanced budgeting techniques, the right tools are essential. This is where Nimble excels, offering real-time budget dashboards, AI-driven forecasting, integrated time and expense tracking, customizable workflows, and collaborative platforms—all designed to make complex financial data accessible and actionable.  Remember, effective budget planning is both an art and a science, and with the right tools and mindset, your project budgets can become powerful assets for achieving success and delivering exceptional value. Sign up for a  Free trial of Nimble.

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Understanding your homebuying budget

How to calculate how much house you can afford.

• Tools and resources
• Common mistakes

How Much House Can I Afford? A Complete Guide

Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate mortgages to write unbiased product reviews.

• The best way to determine how much house you can afford is by working backward from your current budget.
• Look at how much you spend each month and see how a mortgage payment could fit into that.
• Don't forget about other costs like property taxes, insurance, home maintenance, and repairs.

Figuring out how much house you can afford isn't always as straightforward as it seems. Between mortgage preapprovals and one-size-fits-all rules of thumb, it's easy for homebuyers to unwittingly overspend and end up with more house than their budgets can handle. 

The best way to a homebuying budget is to take a personalized approach, looking at what your budget can realistically handle without sacrificing other wants, needs, and financial goals. Here's how you can do that. 

Key factors that determine affordability

How much house you can afford will be determined by:

• Your income: The amount of money you have coming in every month will directly impact how much you can afford to spend on a mortgage payment .
• Monthly expenses: Your mortgage lender will look at your debts when determining how much to approve you for, but you should also consider your other regular expenses, like food, utilities, savings, or entertainment.
• Current mortgage rates: The lower your mortgage rate, the more house you can afford. Even a small change in rates can impact the size of the mortgage you can borrow.
• Available savings: You'll typically need to make a down payment when you buy a house (unless you qualify for a zero-down mortgage like a VA loan). Making a larger down payment means you'll be borrowing less money, resulting in a lower mortgage payment. You'll also need to pay closing costs.
• Your creditworthiness: Lenders look at your credit history, debts, and assets to determine how risky a borrower you are. If you have a strong financial profile, you may be able to borrow more money or get a lower interest rate. 

The 28/36 rule in homebuying

The 28/36 rule is a popular guideline that can help homebuyers figure out how much house they can afford. To follow this rule, homebuyers should aim to spend no more than 28% of their gross monthly income on housing costs, and a maximum of 36% of their income on all their debts combined (including housing costs).

This rule can get you in the ballpark of what a reasonable homebuying budget might look like, but try to avoid relying solely on rules of thumb like this. 

Brian Walsh, CFP and head of advice and planning at SoFi , says that guidelines like this don't account for different budget needs or levels of debt. He also warns that they can tempt you to overspend.

"I think those can be helpful to set context, but the problem is no two people are the same," Walsh says.

Calculating your debt-to-income ratio (DTI)

A lender will look at your debt-to-income ratio when determining how much you can afford to borrow. Your DTI measures how much you pay each month toward debts you owe relative to your gross monthly income. So, if you spend $500 a month on credit card and auto loan payments and your monthly pre-tax income is $2,000, your DTI is 25%. 

On a conventional mortgage , the maximum DTI you can have varies depending on your situation and lender, but 50% is generally the highest acceptable ratio. However, that doesn't necessarily mean that a mortgage fits into your budget as long as your DTI doesn't exceed that threshold. Follow the steps below to set a budget that considers your full financial picture, not just your debts. 

Step 1: Assess your monthly income

First, you need to know how much money you're working with. If you have a single source of steady income, this should be relatively easy. 

If your income varies from month to month, try to establish a baseline for what your earnings typically look like (but be sure to have a plan for how you'll pay your mortgage if you have a month where you earn less than expected). Also, pay attention to how your income has trended over the last few years and whether you think it's likely to increase, decrease, or remain steady. This can help you evaluate how likely it is that you'll be able to keep up with your mortgage payments in the future. 

Step 2: Evaluate your monthly expenses

Take a holistic look at your current budget and see how a mortgage payment could fit into that.

"What we encourage people to do is really start with their budget and work backwards," Walsh says.

This means looking at what you're currently spending on housing and how that fits in with your other expenses, including household needs, retirement and other savings, debt payments, childcare costs, and everything else.

At the end of the month, do you have money left over? Or are you frequently tapping savings or credit cards to cover regular costs? If your budget is already stretched tight, becoming a homeowner is likely to exacerbate that. 

Step 3: Factor in down payment savings and assistance

The more money you put down, the less you have to borrow, resulting in a smaller monthly payment. Making a big down payment can help you snag a lower interest rate as well, which also can make your mortgage payment more affordable.

If you don't have a lot of money saved for a down payment, that doesn't necessarily mean you can't afford to buy a house. It's possible to get a conventional mortgage with a down payment of just 3%. And if you qualify for a VA or USDA loan , you might not need to make a down payment at all. 

There are also many opportunities for borrowers to get down payment assistance . Many lenders now offer assistance in the form of grants or loans that can give you the funds you need to get into a home. Your state's housing finance agency may also offer assistance. 

On top of your down payment you'll also need to pay closing costs, which can cost between 2% and 5% of the loan amount.

Step 4: Consider mortgage interest rates

When mortgage rates are low, your buying power is increased. Say you're looking to spend no more than $2,000 on a monthly mortgage payment. If current 30-year mortgage rates are hovering around 7%, you could borrow a mortgage of around $300,000. But if rates drop to 6%, you could borrow almost $35,000 more and keep that same monthly payment.

No matter how rates are currently trending, shopping around can help ensure you get the best overall deal. Rates can vary quite a bit from lender to lender, so getting quotes from at least three different mortgage lenders can save you a lot of money in the long term.

"Small differences in the loan that you secure, whether it be interest rate, closing costs , origination fees, different things like that, they can really, really add up to big numbers," Walsh says.

Step 5: Figure out your other costs

When you have a mortgage, you won't just be responsible for paying the principal and interest each month. Your mortgage payment will also include property taxes, homeowners insurance , and mortgage insurance (if applicable). If you live in a community with a homeowners association, you'll need to factor in that cost as well.

• Property tax  rates are set by local governments, so how much you'll pay each month depends on exactly where you plan to buy and the value of the home. According to the U.S. Census Bureau, the median property tax paid in Alabama is $718, which would add less than $60 a month to your mortgage payment. But in New Jersey, it's $8,897, which would cost around $740 a month. 
• The average cost of homeowners insurance also varies depending on where you're located and your home's value. In 2021, the average homeowners insurance premium was $1,411, according to the National Association of Insurance Commissioners. This would add just under $120 a month to your mortgage payment. 
• Mortgage insurance will be added to your monthly payment if you make a down payment that's less than 20% on a conventional loan. Freddie Mac says this can cost between $30 and $70 for every $100,000 you borrow. 
• HOA dues can range from $200 a month to thousands of dollars a month, depending on the HOA's budget and the amenities it offers. 

Tools and resources to help you calculate affordability

Mortgage affordability calculators.

Simple mortgage calculators can help give you an idea of what a good budget range might be for you, but keep in mind that many of these calculators rely on that same one-size-fits-all approach that can miss out on the intricacies of your individual budget.

Consulting with a financial advisor

Don't be afraid to seek out a professional opinion if you feel like you're in over your head. Working with a financial advisor can help you ensure that you're balancing your budget appropriately as you prepare for homeownership.

Common mistakes to avoid when determining affordability

Using preapproval to guide your budget.

A lot of first-time homebuyers might assume that it's safe to set your budget based on what the lender says you can afford. But that's often not the case. 

"Most of the time what someone would get preapproved for is much more than what they should actually be spending on a home," Walsh says.

When a mortgage lender takes its initial look at your finances and decides it may be willing to lend to you, it will issue a mortgage preapproval for a certain amount of money. Lenders determine how much they'll lend based on a borrower's DTI, but your actual budget likely includes a lot more than just your income and your debts. You'll also want to have money left over each month for groceries, to save, or to do fun things like go to the movies or take trips. 

Not starting off on strong financial footing

"You should always have a solid financial foundation before you consider buying a home," Walsh says.

This means you'll at least want to have an emergency fund with between three to six months of living expenses saved up. This should be separate from your down payment savings.

You should also consider paying down your debts before becoming a homeowner, especially if you have a lot of high-interest debt. Not only will this make qualifying for a mortgage easier, but it will also give you more room in your budget for your mortgage and other homeownership-related costs.

Make sure you're not neglecting your other financial goals. Having sufficient retirement savings, for example, is extremely important. If owning a home would cut into the amount you're able to save each month, you may need to rethink your budget.  

Ignoring maintenance and hidden costs

When you rent, the landlord takes care of a lot of your unexpected expenses. As an owner, you'll be on the hook for everything. 

Be prepared to pay at least 1% of your home's value in maintenance and repair costs each year. 

"If you don't plan for that, that can really be a silent budget killer where it comes up out of nowhere and you thought you were going to have spare money, but then now you don't," Walsh says.

Assuming homeownership is always the best option

You want to make sure you plan to stay in the home long enough to make buying a home worth it, Walsh advises. Though he says that homeownership can be beneficial for many people, it's not always the right choice for everyone.

"The challenge is there's costs to both buying and selling a home," he says. "So if you don't live in a home long enough to offset those costs, it can actually be a bad financial decision."

Experts often recommend not buying unless you plan to stay in a home for at least five years, but it can vary. Because home values usually rise over time, you'll gradually build equity in the home that can offset the costs you'll incur when you decide to sell. If you move too soon, you could end up spending more than you gained in home value. 

How much house can I afford FAQs

A common rule of thumb is to not spend more than 28% of your income on housing costs, but it's more reliable to look at your individual budget to see how much you can realistically afford.

The more debt you have, the less house you'll be able to afford. Mortgage lenders decide how much you can borrow based on how much debt you owe relative to your income. 

With a 20% down payment, you'll avoid paying mortgage insurance, but you can qualify for a mortgage with as little as 3% down. 

It's possible that you can still afford a house even with student loans, it just depends on how much income you have left over after paying your loans.

• Mortgages and mortgage lenders
• Home equity
• The housing market
• The economy and the forces that impact mortgage rates
• Budgeting and saving
• Retirement savings

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