Building a Business Budget from the Ground Up

Step-By-Step Advice for Small Businesses and Startups

Starting from scratch, building a clear and accurate small business budget is one of the best things you can do to guide your key decisions moving forward, set targets for growth, manage expenses, and ensure that you aren’t spending more than you need to. Whether you are starting a new business or restructuring for an established one, a well explained budget empowers and keeps you focused when making decisions. This guide explains these steps in the process to make a business budget, tells you how things should look on paper and provides tactics to keep your action plan relevant to your specific business and not just ink on paper as time unfolds.

Begin with a reasonable expectation of revenue

A good budget starts with an honest income estimate. Divide out your projected revenue for the time you are budgeting (i.e., per month, quarter or year) based on sales forecasts, historical numbers or conservative market assumptions if a new firm. Other income will be split by product or service line and by channel if you can — knowing where parts of the business are failing or succeeding will be crucial.

List fixed and variable expenses

Break down costs into fixed expenses (rent, salaries, insurance) and variable expenses (materials, shipping, marketing campaigns). Fixed expenses are usually the same each month, while variable expenses vary with sales volume levels or business influences. Make categories for areas like payroll, rent and utilities, supplies, marketing and advertising, professional fees, travel or any other recurring costs that are specific to your business.

Build a cash flow forecast

Revenue and expenses do not equal cash flow. A cash flow forecast records when you actually will receive and pay “cash” in the business based on payment terms, deposits and timing differences. Accounts receivable aging schedules and accounts payable timing. This aids in highlighting potential shortfall and is useful for budgeting working capital requirements.

Create a business budget template

Keep inputs organized with a basic business budget template that uses input to list projected income at the top, and COGS at the bottom after that for gross profit. Below it, put your operating expenses as well as taxes, interest and capital expenditures. Include a line for emergency or contingency funds. (Excel 2007 or later) You can customize columns for each month and add a YTD column to compare actuals against projections.

Include one-time and investment costs

While a lot of budgets account for recurring expenses, they often miss one-time spending needs like equipment purchases, renovations or software licenses. Create a separate section for capital investment and amortize large purchases over their useful life or show them as line items so you aren’t in shock when the bill comes due.

Factor in taxes and the cost to maintain compliance

Try to estimate what you will owe in taxes and save money all year long. Based on your structure and location, payroll taxes, sales taxes and income taxes can affect how much you have to budget. Do Not Wait Until Tax Payments Are Due to Try To Cover Them Treat tax payments as a budgeted expense — don't try to cover them when the tax bill is due.

Define performance benchmarks

Use your budget as a management tool: create KPIs. Typical key performance indicator (KPIs) are gross margin %, operating margin, CAC (customer acquisition cost), AOV (average order value) and break even. Benchmarks determine when actual outcomes are acceptable or warrant corrective action.

Keep track and compare real vs. budget

It’s the use of a budget that is effective, not the budget itself. At least once a month, bring the actual revenue and expense numbers up against your budgeted numbers. Explore outliers: increases in the cost of supplies, slower sales or unexpected one-off costs. Leverage this understanding to refresh the forecast and act on operational changes with confidence.

Have plan B and build in a little flexibility

Unexpected events happen. Include a cushion line in your budget to cover unexpected expenses or more gradual revenue growth. The need to borrow is less so why not keep this hundreds or thousands of dollars on hand as a cushion against emergencies or opportunity.

Iterate and update regularly

A budget is a living document. Refresh it when you get new information: shifts in sales trends, supplier pricing, staffing decisions or larger economic moves. Reforecast on a regular schedule — say, monthly for early-stage businesses or seasons that change swiftly; quarterly for steady-state operations.

Use scenario planning

Formulate at least two other budget scenarios - one optimistic (positive) scenario and one conservative (downside) scenario. Scenario planning helps you envision what the range of possible outcomes is and have yourself in a place to scale costs if things actually prove out.

Communicate the budget with stakeholders

Share the budget whitespace with critical team members so they understand where priorities lie, spending limits and KPIs. When employees and managers understand the financial plan, they can weigh decisions about operations with an understanding of what’s in the best interest of the company.

Monitor expenses, categories and margins

Regular tracking of expenses reveals opportunities for optimization. Review contracts for supplies, renegotiate if possible and search for efficiencies in the process. Spend your efforts improving gpm by pricing, mix or COGS.

Maintain records and build discipline

Maintain precise financial records, and substantiate your assumptions with documentation. Accurate and continuous updating of sales, invoices, and receipts allow meaningful budget comparisons plus eases tax preparation.

Your final checklist to start your business budget from scratch:

• Analyze conservative revenue by product or service line
• Items List and Fixed/Variable Expenses with monthly breakdown
• Construct a cash flow forecast and recognise timing gaps between receipts and outlays
• Capital and one-time expenses included
• Keep taxes and reserves aside
• Establish KPIs and performance targets
• Regularly compare actuals to budget and perform forecast updates
• Have varied plans when you plan
• Share the plan with your team

Drafting a business budget from scratch is part practical accounting exercise and part strategic planning process. It leads you to consider what drives revenue, how costs behave and timing — and it offers a road map for making decisions. Armed with a simple budget template, regular check-ins and the willingness to adjust won’t automatically put you on Easy Street…but it will help prevent some of the financial bumps in the road that can get businesses into trouble.

We even included the most important keywords that this guide is targeting. Employ those as triggers in your internal documents so that the budget process stays tight and actionable.