Matter & Substance
  February 27, 2024

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.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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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