How to Create a Small Business Budget

A structured small business budget clarifies your costs and expenses, and helps to predict your business' revenue and profit.

Getting the financial picture of your business into focus doesn't need to be difficult or feel overwhelming. Below, we'll guide you through what to factor into your budget, including tools and must-have components, a step-by-step guide on how to create one, and tips to stay on track.

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What is a small business budget?

A small business budget is a detailed plan that helps you track and understand your business' finances, including how and where you spend your money.

It's both a document of what's going on with your business now and a future prediction of your business' financial health. Regularly updating your budget with relevant information can help you understand when and how you'll meet your long-term goals.

Some must-have components of a business budget include:

• Revenue estimates: How much revenue you predict to make.

• Fixed costs: This may include money allocated rent (e.g. a physical store), yearly or monthly website maintenance, or materials for the products you sell.

• Variable costs: If you have employees, their wages would fall under variable costs.

• Cash flow: All of the money coming and outof your business.

• Profit: How much you intend to have leftover after calculating revenue minus expenses.

Why is a budget important?

Budgeting gives you clarity on every dollar coming into the business and going out via expenses. By consistently looking at your budget, you'll be able to make better informed financial decisions. For example, you may notice profit dips during specific times of the year. You can adjust by reallocating how many employees are scheduled to work or how much inventory you stock at that time to stay on financial track.

Common budgeting methods and tools

There are a few different methods for budgeting to consider for your business. Which one you choose largely depends on which feels more comfortable for you and what information you need to see day-to-day.

1. Flexible budgeting

A flexible budget adjusts to your business' sales volumes or activities. For example, you may have to pay wages to part-time staff, and allocate part of your budget to that. However, your business may get more sales during certain seasons, so you'll need to hire more staff to handle the volume in busy periods and decrease in slower ones. That would mean keeping your staffing budget flexible monthly or seasonally.

A flexible budget is the most adaptable of the budgeting methods, and will enable you to remain more open if your revenue isn't consistent or there are other changes to your day-to-day operation.

2. Value proposition budgeting

A value proposition budget focuses on tracking and investing in expenses that drive value for the business. If you want to give every expense a strategic purpose and maximize the value you provide to your customers, try value proposition budgeting.

The goal for a value proposition budget is to maintain clear focus on the value drivers in your budget (e.g., specific materials that set you apart from competitors) and eliminate unnecessary spending. For example, a bakery might put more budget toward quality ingredients and staff than branded packaging, since the first two have a bigger impact on customer value.

3. Activity-based budgeting

An activity-based budget breaks down all of your business' activities to predict costs and support your goals. Your activities depend on your business and what you sell but, generally, they may include processing returns, selling products, and creating products.

This method takes every business activity into consideration to understand where the money goes and what efficiencies can be found to cut costs. For example, a consultant might see that they're spending more on marketing activities than last year and consider ways to decrease their spend.

Tools for small business budgets

You'll need some specific tools and software to manage your budget. Some of the essentials include:

• Accounting software: Helps you track all of your budget details in one place

• Invoicing software: Requesting payments from clients, suppliers, or other vendors

• Payment processing: Processing payments from customers, clients, or partners

• Analytics tools: Analyzing your budget and the success of marketing or sales activity

6 steps to create a business budget

Below is a general outline of what to include in your small business budget and how it will help your overall financial wellness. Take your specific goals, products or services, and needs into account when creating your version.

1. Set financial goals

Your short- and long-term business goals will be reflected in your budget. Financial goals vary by business owner and need but, generally, your goals may involve:

• Increasing your profit margin

• Growing into a brick-and-mortar business

• Cutting down on specific expenses

Whatever your goals are, keep them somewhere accessible so that, when you're creating your budget and analyzing it over time, you'll be able to see if you're still on track.

2. Separate business and personal finances

You may find it beneficial to create a completely separate business accountand tracking system for these expenses. Keeping business and personal finances independent of each other not only makes it easier to track the financial health and growth of your business, but simplifies the administrative parts of your budgeting too. For example, there are certain tax implications, such as deductions, that are applicable only to your business.

This also helps to ensure you're not confusing personal budgets or expenses for business savings or costs.

3. Identify and total all revenue streams

Start by defining where your sales are coming from on a monthly basis. Take into account all of your business' income sources for the month.

Your revenue streams may include:

• Online sales

• Consignment sales (if you sell your products in another retailer)

• Trade show or market sales

• Project-based fees or consultation

• Subscriptions or memberships

• Sponsorships or partnerships

Once you've accounted for every income stream, add them all up to get your monthly revenue.

Look back six to 12 months to get a fuller picture of trends for each revenue stream. Look for trends around expenses or when sales usually spike or remain stable. You'll be able to see what revenue sources are consistent and which ones are more variable.

4. Calculate your fixed costs

Your next step is to calculate your expenses, which are broken out into two different costs: fixed and variable. Start by identifying your fixed costs.

Your fixed costs are recurring expenses. These can be anything that needs to be paid out weekly, monthly, or yearly. Some of your fixed costs may include:

• Rent

• Website hosting or domain name costs

• Insurance

• Materials and supplies for your products

• Part- or full-time staff

Looking back at the historical data here will help, too. Just keep in mind that these costs may change over time for a variety of reasons, like inflation, tariffs, or increases in taxes.

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5. Calculate variable costs

You will inevitably have expenses that aren't as predictable as your fixed costs. These are called variable costs-amounts that fluctuate month-to-month-and may include discretionary expenses. Some of your variable costs may include:

• Special materials for limited-run products

• Fees paid to consultants or freelancers

• Travel costs

• Shipping and delivery fees

Discretionary expenses can be decreased or eliminated from your budget if needed. They tend to be non-essential to the business. For example, website hosting for your business is essential, but a professional website designer may not be.

6. Set up an emergency fund

All businesses will have good days and bad days. It's important to have an emergency fund for the bad days. Consider setting aside up to six months worth of expenses into your contingency fund.

An emergency fund functions as a safety net for your business. In the event that you can't pay for a specific cost (e.g., wages or materials for your products) because of lowered profits or less sales than you had forecast, you can dip into the fund to make sure you're paying your expenses on time and in full.

You can also use this fund for unexpected costs, like tariffs, or limited-time product and marketing opportunities. You can create a separate bucket or account for this in your business banking. In Squarespace Payments, you can also earmark some of your earnings in your account for this purpose and access them in minutes with Instant Payouts.

Make sure to replenish your emergency fund if you ever do need to use it.

How to stay on track with your budget

Staying on track with a business budget can be difficult. Sometimes there are unexpected costs and issues that you have to deal with to keep your business running.

But when things are going to plan, there are a few ways you can make sure you're staying well within your budget.

• Return to your goals: You'll likely change your goals over time as you grow. But prioritizing your financial goals will help you monitor your budget consistently.

• Monitor expenses: Track your expenses. If you have employees, are you scheduling more people than you actually need? Can you reduce your materials costs without sacrificing quality on your product? There will always be ways to save money and stay on budget, you just have to know where to find those savings.

• Observe and adjust: The best way to keep on track with your budget is to consistently look at your costs, expenses, revenue, and profit. Keep an eye out for trends and ask yourself where those trends work with or against your financial goals, then make changes or lean into a practice as needed.

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