Budgets are the best plans small businesses can have to aid financial security and success. Budgeting provides a roadmap for profits and expenses, helping to identify risks and opportunities for growth.
Budgets can also support employee engagement, learning, development and future investments in technology and research. In this article, we'll guide you through the four main steps to take when creating a budget for your small business. But first, let's recap on what a business budget should include.
What is a budget in business?
Simply put, a business budget is a costed spending plan. It estimates costs and profits over a given period of time. A budget is typically created using historic data to predict what these figures may be in the future. For example, if a company spent £10,000 on office rent and £3,000 on utility bills the previous year, it may budget to spend the same the following year.
In this way, a business budget helps owners to identify how much capital is available and how much the business needs to keep running over a specific period of time.
What should a business budget include
A business budget should include income, cost of sales, as well as all fixed and variable costs, says Simon Fordham, a business board advisor and Chair of the Association of Business Mentors. Fixed costs are those you pay regularly that don’t change, such as utilities, salaries and office rent. Variable costs are those that fluctuate with the number of sales you make, such as raw materials, labour, packaging and shipping.
Investments in training, research and development, marketing, and technology and innovation should also be included, but can often be overlooked in budgets, says Fordham. A budget can also include cash flow projections, which will show you not only how much money is coming into and out of your business, but when. This means you can quickly spot the right time to invest and when to save.
Finally, a business budget should include expected profit, which is calculated by subtracting all your costs and expenses from your projected revenue.
How to create a budget for a small business
Step 1: List expenses
Start by looking at your fixed and variable costs. For Megan Goddard, Head of Finance at London-based interiors brand Plank Hardware, variable costs include stock, advertising and delivery fees and fixed costs cover staff, rent and technology. Then add these together, along with any other known and expected expenses, such as new laptops for employees.
Step 2: Forecast revenue
As well as knowing how much money your business will spend, you need to know how much it is likely to make. The best way to forecast this is by looking back at previous years' earnings and using this as a base to predict how much you will likely bring in for the next period.
"We start with historic data to inform the shape of our forecast revenue but overlay adjustments to create a more informed plan based on what we know we are planning to do in that year," says Goddard.
"Considerations include promotional sales, range extensions, location expansions and advertising budget increases."
However, no revenue forecast can ever be 100% accurate. To give you greater flexibility in your cash flow, the American Express® Business Gold Card offers a payment period of up to 54 days, making it easier to smooth out any unexpected changes in revenue¹.
Step 3: Estimate profit
Once you've determined your expected expenses and revenue for the period, you can calculate whether you're likely to be making a profit or loss. To do this, simply deduct expenses from revenue.
Plank Hardware introduced further granularity to profit estimations this year, by looking at profit and loss by location. This helped Goddard to spot the most profitable parts of the business more easily.
Step 4: Review and plan
The purpose of a budget is to support decision-making, so once you've worked out your incomings, outgoings and expected profit for the period, you can start manipulating the figures to align with business plans.
For example, if you want to hire new employees, you can input the expected costs of these new hires. From here, you can see the impact on profit and if needed, adjust spending in other areas of your business to accommodate these new hires. Or perhaps you want to set a profit target for the year, in which case you could adjust the price of your products or service, or the costs involved in producing them, to reflect your profit target.
It's also important to update your budgets regularly. Plank Hardware, for example, updates budgets every quarter. It also reviews sales variances every week and more thoroughly, with profit and loss, at the end of every month, to ensure its tracking closely to its cash trajectory, says Goddard.
Finally, it's important to share your budget and capture feedback from other stakeholders, says Fordham. "A challenge is presenting your budget to others without considering it a ‘done deal,” says Fordham.
“Be open to others' comments and to change, always seek validation from those around, either within your company or from an external advisor, such as a mentor or accountant as it’s very probable they will see something you might have missed.”
Why a budget is important for business
Budgets provide a financial roadmap of your business, enabling you to make quick, data-led decisions, such as when to invest and when to save, across all areas of your company. Here’s a closer look at a few of the benefits of budgeting:
Setting targets
"Budgeting enables me and the Plank Hardware management team to forecast what is achievable with the cash flow we have, plus highlights pockets of opportunity for growth and/or savings," Goddard says. In this way, budgets allow you to set targets, such as sales or recruitment goals, identify priorities and then track performance against these goals.
Fordham suggests sharing budgets with internal teams. “It’s often good to have devolved budgets for areas of responsibility within the business,” he says. “It’s the grown-up way of letting your team and leaders know you trust them to get on with the job, so it can be an important part of employee development and growing the business.”
Efficiently allocating resources
Budgets enable you to spot profitable and less profitable areas of the business, as well as any financial risks. This means they can support you in more efficiently allocating company resources to where they're needed most, whether that's in growth and expansion activities, or to save for the future.
"We discovered that some locations were substantially less profitable than others," Goddard says. "So we have diverted our marketing efforts into the most profitable areas to grow our revenue more efficiently this year."
Raising money
Budgets allow you to identify areas where you may want to consider alternative financing options, Goddard says. At the same time, they can support you in raising external funding, such as a bank loan or equity investment, by demonstrating the financial position of your company.
Investors will want to understand how much money you’re making, how much it costs to run your business and how much it takes to produce your products or services. This will give them more confidence to invest.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
