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By Thad Warren
Running a business without a budget is like driving with your eyes closed—you might get lucky, but the odds aren’t in your favor.
Creating a business budget is more than just numbers on a spreadsheet; it’s a financial roadmap that helps you control expenses, plan for growth, and avoid cash flow disasters. Whether you’re just starting out or looking to fine-tune your finances, a solid budget can mean the difference between thriving and barely surviving.
This guide will walk you through the essential parts of a small business budget, giving you a starting point. Every business is unique, and your budget should be, too.
A business budget is a financial plan that estimates income and expenses over a set period—typically monthly, quarterly, or annually.
In short, it tracks the money going in and out of your business. Effective business budgeting involves using practical resources and templates to create a structured method for tracking income and expenses while managing finances proactively to avoid cash flow issues.
Budgeting gives you control over your business finances, helps you stay profitable, and prepares you for the unexpected. Let’s examine why budgeting is essential, using real-life examples and insights from successful business leaders.
When you have a clear budget that lists all your expenses, you know exactly where your money is going and can make informed decisions. Without one, you’re operating on guesswork, which can lead to financial chaos.
Howard Schultz, former CEO of Starbucks, once said: “Risk more than others think is safe. Dream more than others think is practical.”
While taking risks is necessary in business, Schultz always emphasized financial discipline in scaling Starbucks. The company’s success wasn’t just about great coffee—it was about carefully planned growth, backed by a strict budgeting process to open thousands of locations worldwide.
Example: Imagine you own a bakery. You bring in $10,000 a month but don’t track where it’s going. Without realizing it, you’re overspending on premium ingredients and unnecessary marketing. Suddenly, you can’t cover your rent. A simple budget that lists all your expenses would have flagged the overspending before it became a crisis.
A business can have high revenue but still struggle financially due to poor budgeting and ineffective business budgets. Tracking profitability ensures you’re not just making money but actually keeping some of it.
Warren Buffett, one of the world’s most successful investors, said: “Do not save what is left after spending, but spend what is left after saving.” Buffett’s philosophy applies to business owners too. If you don’t prioritize profitability in your budget, you’ll always be playing financial catch-up.
Example: A digital marketing agency earns $50,000 a month, but after payroll, rent, and software subscriptions, there’s barely anything left. By reviewing their budget, they find $5,000 in unnecessary tools and office expenses they can cut, turning their business from break-even to profitable.
Unexpected costs can sink a business if you're not prepared. Whether it’s a slow sales month, equipment failure, or an emergency expense, having cash reserves is crucial.
Sara Blakely, founder of Spanx, built a billion-dollar brand with just $5,000 in savings. She said:
"I’d rather have security and a rainy-day fund than a flat-screen TV." Blakely understood that financial cushioning is the key to surviving tough times and taking opportunities when they arise.
Example: A restaurant owner unexpectedly has to replace a broken refrigerator—a $3,000 expense. Without savings, they’d have to take out a high-interest loan. But because they budgeted an emergency fund, they pay for it upfront and avoid debt.
A good budget isn’t just about surviving today—it’s about growing tomorrow. If you plan your finances well, you’ll have money to invest in new opportunities, hiring, and expansion.
Jeff Bezos, founder of Amazon, once said: "If you only do things where you know the answer in advance, your company goes away."
Bezos scaled Amazon by strategically reinvesting profits into growth. But this only worked because he had a budget that balanced reinvestment with financial stability.
Example: A gym owner wants to open a second location. Instead of taking a risky loan, they allocate 10% of monthly profits into a growth fund for a year. By budgeting ahead, they expand debt-free and build their business safely.
Budgeting isn’t about restricting spending—it’s about being intentional with your money.
Your budget will have at least 5 key components. Depending on your business, it may have more or even subsections within these core areas:
Your revenue is the money coming into your business, primarily from:
Pro Tip: Be realistic when estimating revenue. Look at past trends and consider seasonal fluctuations when forecasting your predicted revenue. A budget can help you estimate money inflow and outflow, enabling proactive resource management and strategic growth planning.
These are the fixed costs you must pay every month, regardless of revenue:
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Variable costs are expenses that change based on sales or production. For example, if you are a lawn care company, gas is a variable cost because the more yards you mow, the more gas you will use.
Some common variable expenses include:
Tip: If business slows down, these are the expenses you can adjust first.
Tracking your monthly expenses is crucial for managing cash flow and identifying potential cost-saving opportunities.
Keep a small amount of cash on hand for a rainy day. You never know when a piece of equipment might break or an unexpected tax bill may land on your desk.
For example, if you own a restaurant and your oven or stove breaks down, you could be responsible for thousands of dollars in repairs. Not to mention the cost of electricity if faulty heating has driven up your bill. These expenses are steep, but they’re not ones your business can live without.
You can’t predict everything, but you can prepare for one-time costs like:
Set aside an emergency fund with at least 3-6 months of expenses.
A successful business budget doesn’t just aim to cover expenses—it should be designed to ensure profitability and growth. Setting clear profit goals helps you determine how much revenue your business needs to generate and where to allocate earnings.
Start by asking yourself: How much profit do I want to make?
Profit is what remains after subtracting all expenses from revenue. However, not all profits are created equal. A business generating $500,000 in revenue with $480,000 in expenses is technically profitable, but with only a 4% profit margin, it may not be sustainable long-term.
A healthy profit margin varies by industry, but here are general benchmarks:
Pro Tip: If you’re unsure what your profit margin should be, research industry standards or aim for at least 10-15% as a starting point.
Once you define your desired profit, work backward to determine how much revenue you need to generate.
This calculation gives you a baseline revenue goal, but there are additional factors to consider:
If your projected revenue doesn’t meet your profit goals, you may need to:
Once your business is profitable, the next decision is how to use those profits. Some key areas to consider:
Reinvesting in Business Growth
Building a Financial Safety Net
Paying Yourself as the Business Owner
Saving for Long-Term Stability
Setting profit goals is not a one-time task. Review your financials at least quarterly to track progress and make adjustments. If profits are lower than expected, analyze whether expenses are too high, pricing is too low, or revenue is falling short.
Key Metrics to Monitor:
If your profit margins aren’t where they need to be, it’s time to optimize—either by increasing revenue, reducing expenses, or both.
Profit is not just a number—it’s what fuels your business’s sustainability and success. Setting clear, realistic profit goals ensures that you’re building a business that not only survives but thrives.
Analyze historical financial data to identify trends and anticipate future cash flow.
Project your revenue based on realistic sales expectations rather than assumptions.
Identify and categorize your costs to control spending and improve financial planning.
Using a business budget template can simplify this process by providing structure and helping you avoid mistakes while tracking financial forecasts and expenses.
Set aside cash reserves to cover unforeseen business expenses.
Regularly review and update your budget to stay on top of changing financial conditions.
A well-structured budget isn’t just a financial document—it’s a strategic tool that helps you make informed decisions, maintain financial stability, and drive business growth. By following these steps and consistently tracking your progress, you can create a budget that adapts to your business’s evolving needs. Additionally, utilizing a budget template tailored to your specific business needs can further enhance your ability to track income, forecast expenses, and make informed decisions.
Being optimistic is usually a good thing, but when it comes to small business budgets, you need to consider all scenarios.
A good practice to ensure that you have considered all scenarios is to create three versions of your expenses: best case, likely case, and worst case. This will help you consider the range of possibilities.
Always round up expenses and leave room for surprises.
You didn't start your business to create and monitor budgets—that's just an unpleasant part of the job.
But it is incredibly important. You should review, update, and track your budget weekly or at least monthly.
The best thing you can do is block your calendar and set a time each week to review your budget. If you stay on top of it, 15-30 min a week will save you hours and heartbreak in the future.
Your business changes and your budget should too.
Cash is king. Your business may constantly record sales, but are you actually receiving the funds for the products or services sold?
Here is a real-life scenario: A construction company's invoicing software lists a dozen kitchen remodels. On paper, this looks like they were making money hand over fist, but each project only required a down payment to get started.
The construction company then had to buy the materials for the remodel. After purchasing the materials, they were already in the hole. Not to mention, each project takes weeks or even months. So, despite showing nice revenue in their accounting software, they struggled to have cash on hand because they hadn't finished the jobs and been paid in full.
Even if you're profitable, you can run out of cash if revenue is delayed.
A small business budget isn’t just about cutting costs—it’s about making smart financial decisions so you can grow and thrive. Start with a simple budget, adjust it as you go, and stay proactive about your expenses.
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