Small Business Owner smiles in his workshop

How to Set Up a Budget for a Small Business

A well-documented budget is essential to the short- and long-term success of any small business. As a small business owner, you must know where every dollar goes—including revenue, expenses, contingency funds, and more. Organizing this financial data will help you determine whether you are on track to meet your goals and inform your financial decision-making.

In other words, your small business needs a monthly, quarterly, and yearly budget.

What Is a Small Business Budget?

A small business budget is a projection of future revenue and expenses based on numbers from past months and years. The budget is used to inform financial decisions and is the first step in creating a realistic spending plan.

You can think of your budget as a baseline for comparison. As the year, quarter, or month progresses, compare the actual numbers to your estimations in order to determine if you are over or under budget.

The process of creating a budget and using it as a point of comparison helps hold your business accountable and makes it more likely that you will reach your financial goals.

Why Every Business Needs a Budget

Every business—even small ones—needs a detailed budget. These financial estimations offer several benefits for small businesses:

  • Helps you navigate financial fluctuations over time
  • Ensures you have enough cash on hand to handle a crisis
  • Identifies leftover funds
  • Maintains financial security
  • Offers data for potential investors
  • Provides the information you need to achieve long-term goals
  • Acts as the basis of your business’s financial plan
Small Business owner carrying merchandise

Reviewing exactly how much money is moving into and out of your business gives you a clear idea of whether you are headed in the right direction.

How to Set Up a Budget for a Small Business

Creating a budget isn’t the most exciting task, but it is an important part of operating a successful small business. Follow these steps to review your revenue and expenses, establish an emergency fund, and set up a small business budget.

1. Separate Your Personal & Business Finances (If You Haven’t Already)

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If you are establishing a new small business, remember to separate your personal and business finances. Mixing these accounts can lead to disaster, so it’s important to keep your small business as a separate, independent entity.

Start by incorporating your business as an LLC, S Corp, or C Corp; applying for a business checking account; using a business credit card; and adopting a business accounting system that is separate from your personal finances.

2. Establish a Contingency Fund

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At any moment, unexpected costs can arise due to an emergency, economic downturn, broken equipment, vendor error, or some other type of unfortunate event—and these surprises always come when you least expect them. To ensure your business can continue to operate during trying times, set aside a contingency fund that covers at least three to six months of your operating expenses.

3. Identify Revenue Streams & Estimate Revenue

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Revenue is the money your small business generates (before subtracting expenses). Identify your revenue streams and track how much revenue they contribute. Look at how your revenue changes throughout a month, quarter, and year to find seasonal patterns, and use last year’s figures (if you have them) as a starting point for the coming year.

Accurately estimating revenue will help you set realistic revenue goals for your team.

4. Determine Fixed & Variable Costs

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Your budget should also include your fixed and variable costs from last year to use as a baseline for next year’s budget.

Fixed costs are recurring expenses that come up daily, weekly, monthly, or annually. They can include anything from rent and employee salaries to taxes and insurance. You must set aside money to cover these expenses, so make sure you factor fixed costs into your budget.

Variable costs are inconsistent expenses that change depending on how you use them, such as advertising costs, supplies, wages for hourly employees, professional development opportunities, and utilities. Keep track of these expenses on a monthly basis so you can more accurately predict how much money you need to reserve for them in next year’s budget.

5. Consider Seasonal & Industry Trends

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Throughout the year, your small business will go through fluctuations. During some months, business will be booming, while there may be other months where things are slow. Keeping an eye on seasonal and industry trends that affect your cash flow will help you make a more accurate budget. Identify patterns if you can, and use those insights to figure out how much revenue you need to generate during peak months to sustain business operations during off seasons.

6. Calculate Your Profit

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Now that you have determined your revenue and expenses, you can calculate your monthly, quarterly, and yearly profit.

Sum up your revenue streams and expenses for each month and then subtract total expenses from total revenue. The resulting figure is your profit. A positive number means you are making a profit, and a negative number means you are operating at a loss (for now).

7. Finalize Your Small Business Budget

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With all the pieces of the puzzle in place, you can finalize your small business budget using a spreadsheet, accounting software, or other financial program. Since your budget is based on last year’s figures, it should be a realistic and accurate way to make sure you are meeting your business goals and set up for financial success.

In the coming weeks and months, pay close attention to your budget and compare it with your actual numbers. Are you aligned with your business goals? Are you overspending? Are you maintaining a sustainable profit?

If reality doesn’t line up with your estimates, you can make adjustments and establish a strategy to get back on track.

Contact Fisher, P.A. to Get Help with Your Small Business Budget

Whether you are starting a new small business or looking to expand, we’re here to help you create a budget, optimize your cash flow, and manage your finances.

At Fisher, P.A., our team of experienced accounting professionals are ready to answer your questions, walk you through our business accounting services, and show you how to grow your company. We cater to businesses of all sizes throughout the United States, aiming to alleviate the burden of accounting from your shoulders.

Our skilled team is ready to get to work so you can get back to doing what you do best: running your business. Call us at 704.332.7800 or fill out our contact form today to schedule a consultation.

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