How to create a small business budget

Business Budget
Businesses need budgets. So how do you go about setting a business budget? What are the main things you need to put in? And what will it tell you? Bookkeeper, Emma Northcote-Green, takes us through budgeting 101.

Emma Northcote-Green – Managing Director, Fresh Financials

This guide is brought to you by Xero and our Xero partner, Emma Northcote-Green, because we share a passion for helping businesses everywhere thrive.

Small business budgets are empowering. They give you the knowledge and insight to eliminate wasteful spending and get to profitability faster. A well-planned small business budget will:

  • show you how many sales you need to cover costs

  • figure out how much money you can reinvest in the business

  • find out when you can afford to hire help

When setting a business budget, you need good numbers. Don’t guess at what’s coming in and what’s going out. You could be making assumptions that just aren’t true. Take the time to look into your accounts and dig out the real figures. It might sound like hard work but it’s worth it.

Small business budgets are easier to make than you think

Budgeting has a lot of baggage. It sounds boring, complicated and even daunting. But there’s no need to put it off. There are just three broad sets of figures to get your head around and they’re really simple.

Setting a budget is part of becoming financially literate, and it’s a vital skill. The better you can ‘read’ the figures relating to your business, the more successful you’ll be. And you don’t need to become an accountant to do it.

The numbers that matter when setting a budget

So, which figures are important for your small business budget? Fortunately you don’t need to consider everything. These groups of figures clearly tell the story of your finances:

1. Profit & Loss report

This report tells you at a glance whether you’re making money or losing it. To do that, you’ll subtract your expenses from your income.

Income (revenue): How much money are you generating from sales of your products or services? It helps to break these into:

  • Recurring income: regular and reliable revenue from client retainers and contract work

  • Expected income: predictions of future income. This is a forecast of what your business is likely to earn.

Expenses (costs): How much money are you spending on business costs such as staff, raw materials and marketing? As with income, it helps to break these into:

  • Recurring expenditure: your monthly payments for rent, utilities, payroll and so on

  • Sundry costs: occasional payments for office supplies, client entertainment expenses and other items

It can be easy to overlook some of the costs of doing business. To help capture them all, consider thing like:

  • Depreciation: business assets, such as computers and equipment, lose value as they get older. That should be counted as a cost.

  • Overheads: make sure you don’t overlook fixed costs such as rent or energy (eg, electricity, gas, transport fuel)

  • Payroll: the total cost of employing your staff – including insurance, taxes and benefits.

  • Debt repayments: regular outgoings to repay loans or other business investments

If you have more revenue coming in than costs going out, you’re making a profit. If it’s the other way around, you’re making a loss. A loss is okay in certain situations but losses aren’t sustainable over the long term.

If you make a profit, think carefully about what to do with it. Could you:

  • drive bigger profits by reinvesting in the business?

  • save money by paying down debts quicker?

  • keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?

There are many ways to treat a profit and setting a business budget will help you decide on the right strategy. 

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