How to Create a Business Budget in 6 Steps

female entrepreneur planning business budget on a laptop computer, how to create a business budget

Estimated reading time: 5 minutes

Planning and managing your business’s budget can help you understand your financial situation at any time. This knowledge lets you pinpoint areas where costs can be reduced or optimized while maximizing revenue-generating activities. Moreover, a comprehensive budget helps establish realistic financial goals and strategic objectives for your business.

Coming up with a budget may seem challenging and time-consuming, but it can be a relatively straightforward process. This Balboa Capital blog post explains how to create a business budget in six steps.

1. Set realistic business goals.

Having clear and realistic business goals is crucial to your business’s success. These goals act as a roadmap, guiding decision-making processes toward achieving financial health, stability, and long-term growth. By setting goals, you can establish a framework for measuring performance, tracking progress, and making decisions that align with your overall mission and vision.

Whether increasing revenue, improving profitability, or reducing expenses, having clear goals can help you stay focused. Moreover, your goals can be used when creating a budget for your business.

2. Assess your business’s financial situation.

Before creating a budget for your business, it is crucial to assess its financial well-being. This evaluation will offer insights into your business’s financial state and enable you to recognize areas needing attention. You can make informed decisions about your business’s future growth and success by analyzing your income, sales revenue, expenses, and cash flow. As you know, this data is included in your company’s financial statement.

It is essential to keep timely financial reporting throughout the year. Incomplete or outdated reports can lead to mistakes and omissions and present you with inaccurate information. Plus, you will need accurate financial statements when it comes time to file your business tax return or apply for business funding.

3. List and evaluate your business expenses.

Expenses are an integral part of your business’s budget. By listing and evaluating all costs incurred by your business, you can see where your money is being spent. This allows for better resource allocation and identifying areas where cost-saving measures can be implemented.

Take a look at your fixed expenses (e.g., office rent, lease payments, loan payments, insurance premiums, salaries/wages) and variable expenses (materials, transaction fees, billing labor, commissions). Every penny counts, so consider ways to reduce your spending. Common strategies include shopping for different vendors and suppliers, consolidating bank accounts, avoiding unnecessary/excess debt, and eliminating expenditures that aren’t contributing to the bottom line.

4. Do the math.

Creating an effective business budget involves a simple math formula based on the results of the steps indicated above. First, calculate your sales revenue for a specific period (e.g., one year). Your revenue is the total amount of money coming into your business prior to expenses being deducted. Then, tally up your company’s fixed and variable expenses and subtract them from your total revenue.

Let us use a stereo equipment manufacturer to illustrate this formula. The company’s revenue was $1,550,000 last year, with $250,000 in fixed expenses and $450,000 in variable expenses. To determine the costs to manufacture the stereo equipment, the fixed and variable costs need to be subtracted from the total revenue:

$1,550,000 (annual revenue) – $700,000 ($250,000 in fixed expenses + $450,000 in variable expenses) = $850,000 (costs to manufacture the stereo equipment)

5. Update your profit and loss statement.

Once you complete step 4 above, you can update your business’s profit and loss statement. In a perfect business world, you would show a profit after subtracting your expenses from your income. A negative number means your company lost money during the applicable time frame.

Don’t worry if your business shows a loss. Myriad factors contribute to this, such as seasonality (some businesses are not profitable every month of the year), increased competition, and pricing strategies that need to be revised.

6. Complete your financial projections.

The final piece of the business budget puzzle is to complete your financial projections for the next month, quarter, year, or several years. Here are the most common types of financial projections used by businesses.

Revenue projections

These estimate the income your business expects to generate over a specific period. These projections consider factors such as sales volume, pricing strategies, market trends, new products/services, and anticipated customer demand.  

Expense projections

These outline the anticipated costs associated with running your business. By accurately projecting these costs, you can better manage your budget and identify potential areas for cost reduction or optimization.

Cash flow projections

These show how money will move in and out of your business’s accounts. This includes projected inflows from revenue sources and outflows from expenses such as loan repayments or vendor payments.

Profit and loss projections

A profit and loss statement summarizes your business’s revenues minus the expenses incurred during a specific period. This document provides an overview of your company’s financial performance by showing whether it has made a profit or incurred losses.  

Balance sheet projections

Balance sheets provide an overview of your business’s financial position at a given time by detailing its assets (e.g., cash reserves, property) and liabilities (e.g., loans, outstanding payments). Balance sheets convey overall financial health, enabling you to assess your ability to meet short-term and long-term obligations.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.