How To Create A Business Budget: A Step-By-Step Guide

Your startup found a nice niche in the software as a service (SaaS) industry, providing customer relations management or supply chain oversight for consumer websites. So far, so good. But as the end of the third quarter nears, you notice trouble on the horizon. If your startup doesn't understand how to create a business budget, you could be headed for cash-flow problems, operational deficits, and potential bankruptcy.

Running a successful business long-term is difficult. For instance, only 34% of businesses established in 2013 were still in operation 10 years later. Running a business is challenging enough, and without proper business budgeting, it becomes nearly impossible. Read on to learn how building the best budget can help your budding business thrive.

The Importance Of A Business Budget

Trying to run a start-up without an adequate budget is like trying to hike without a map, trailheads, or a compass. You may get to your destination by sheer luck, but planning ahead will help ensure you don't get lost in the woods.

When you build a budget for your organization, you create a workable plan for your business finances by balancing revenue streams against business expenses so your large or small business budget stays balanced. Building an organizational budget gives you a 30,000-foot financial view so you don't get lost in the weeds.

Why is a budget important? So your finances don't start to wander without a guiding plan.

Benefits Of Effective Budgeting In Business

Creating a workable budget for your startup promises to benefit your business in several significant ways. First, budgeting ensures your company's resources are allocated appropriately and according to plan, so you efficiently invest resources where they're intended. Second, you have greater control over expenses through excellent expense tracking and record-keeping, meaning you can closely track spending to adjust as needed. Finally, you can use historical data and predicted future income to provide an accurate portrait of your business's likely financial future, allowing you to plan and spend accordingly.

Key Steps To Create A Budget For Your Business

As you read through this step-by-step guide to creating a budget for your business, keep in mind that the application of these principles may look different depending on your setting. There is no one-size-fits-all guide to building an exhaustive budget for your business, but the steps below will help you cover the most important parts of the process.

Instead of a rote business budget template, you'll see the steps to build your own. Creating a budget for your business takes time. But remember, you're laying the foundation for your company's financial future, so it's important to be thorough.  

Gather Financial Documents

Start by gathering all the relevant financial data you'll need to build out the company budget. These will include things like income statements, cash flow statements, historical ledgers, and balance sheets. If you have more reliable data, your master budget can be better suited to your business needs. On the other hand, a failure to find the right documents could lead to over-projected income, under-projected expenses, or under-utilized capital.

You need to find data that's new enough to be relevant but old enough to provide a decent overview. An income statement from 1994 may be amusing, but it's unlikely to be helpful. Likewise, a seemingly catastrophic quarter could simply be an anomaly once you see that quarter in its cash budget context.  

Review Past Financial Performance

Past performance is the best indicator of future performance. Once you've gathered the needed documents, conduct a thorough review. This review has a few different purposes. First, it's always good to investigate where expenses might be outpacing revenue streams. Second, reviewing past financial performance provides a story, whereas a balance sheet provides a snapshot. When you dive into the company's past, you gain insight into previous market trends and patterns, as well as how your business has responded. Finally, searching past financial data can provide insight into the costs your company incurs over time, allowing you to distinguish between a yearly temporary price bump or a new permanent cost.  

Outline Your Business Goals

Before you decide how to allocate resources or where to cut spending, write out what you want the business to achieve over the coming months or years. It can be helpful to set focused, time-sensitive, well-structured goals in different areas of operation. There are many helpful ways to develop goals. The SMART goal-setting schema has a proven track record. As you set up budget goals, they should be specific, measurable, achievable, realistic, and timely.

For instance, a business specializing in supply chain management might seek to increase revenue by 5% next quarter via a specific SaaS product they've only recently introduced. This goal is well-structured because it follows the SMART outline. On the other hand, if you don't provide timely checks or specific criteria to watch, the goal would be difficult to measure, much less achieve.

Estimate Your Revenue

The next step in building a business budget is tallying up your projected revenue from all sales volume and other income sources. The difficulty will vary depending on your industry and business model. For instance, revenue for a SaaS company that uses a monthly or quarterly subscription model might be easier to predict than a business dependent on non-recurring sales.

For many businesses, revenue estimation should begin with an in-depth look at the historical data and an up-to-date assessment of consumer behavior as predictive of the future. In other words, you should look to the past and the future to see how things have gone year over year and how consumers might behave in the coming months. This will enable your company to ascend to prescriptive analysis, in which you leverage the insights of both historical analysis and consumer behavior to predict future trends.

Determine Fixed Costs

As you construct your company budget, you must specify which expenses you might categorize as fixed costs. Fixed costs don't fluctuate based on operational output or activity, so they can become a routine line in your yearly budget format. To determine fixed costs for your company, look at the cash flow statements you've compiled and note which expenses don't change based on how "good" business is going. These will be things like salaries, rent, and utilities.

Once you've observed your fixed business expenses, you have a key piece of info that can be used further down the road. For instance, you might use fixed costs to calculate a break-even analysis. In the meantime, be sure to keep an eye on these fixed costs and update them as rent increases or employees get raises.

Estimate Variable Expenses

When you try to set a budget plan, the unforeseen is the hardest to plan for. Even so, you can anticipate unexpected costs using a variety of models that seek to anticipate the unexpected based on data from previous years. For a manufacturer, variable costs would include the cost of raw materials, which fluctuate in the commodities market. For a software company, variable expenses may take the form of sales commissions, bonuses, or even increased labor costs to keep software customer support on par as the company grows.

Many traditional businesses calculate total variable expenses using variable costs per unit. After crunching the numbers, a car maker may expect $300 of variable cost per unit (car) produced. Business budget templates for other companies will look different.

In the SaaS business world, the variable cost per unit formula can be calculated based on the shifting costs associated with attracting a new subscriber to the platform or client for the product. In this budget example, you can see how this makes anticipating the future a little easier.

Forecast One-Time Spends

Predicting one-time expenses can be challenging, but there are strategies to help you navigate the terrain. First, use historical data as your guide. If your company has been around for a while, analyze past records and pay special attention to seemingly one-time costs that pop up every 3-5 years. For example, replacing the copier might seem like a sudden expense, but if you notice it breaks down every five years, you can budget for it in advance to avoid a cash crunch.

Second, let your high-level strategic planning inform your one-time expense structuring. If your startup needs to recruit more engineers to research and develop the next phase of software development so the company can advance the vision, your budget should plan for this one-time expense. Of course, once you've hired these employees, their salaries will become fixed income, but the cost to recruit them is a one-time expense incurred in service to the vision of the organization.

Create A Contingency Fund

When unexpected expenses arise, like the air conditioner breaking down in July, many people rely on an emergency fund to cover this cost. Similarly, a contingency fund can serve a startup business by providing a financial safety net for unforeseen expenses or emergencies. Building a business emergency fund can look different depending on the size, age, and health of your start-up. But in general, keeping 3-6 months of expenses in cash reserves is a great goal for most companies.

One effective strategy to build a contingency fund is to save a fixed percentage of profits each month. While it's beneficial to let the contingency fund grow, a better use of capital may be to cap the savings at six months' worth of expenses and further fund other aspects of the business for bigger returns.

Consolidate And Review The Budget

Your budget will likely involve contributions from various departments, each providing data that will eventually be consolidated into one master budget. It's essential to compile all this information in a consistent format. Once all the numbers are in place, you can review them to find any overlaps, redundancies, or discrepancies.

During the budget review process, it's a good idea to maintain open communication with department heads. This will foster transparency and make it easier to have tough conversations later on. Ensure the budget aligns with the mission and vision of the organization, even if it requires cutting back in one area of the organization so another can thrive.

Monitor And Adjust The Budget Regularly

Be sure to keep an eye on the budget and shift your priorities as needed. The historical data on which your budget is based will change over time, so your budget must change accordingly or risk becoming outdated. Be on the lookout for new or increased fixed costs, changes in variable costs, or other budgetary features that can change relatively quickly.

Monitoring your budget closely can help indicate financial performance in a couple of different ways. First, budget forecasting assumes you follow the budget and estimate your revenue and expenses on the front end. After the fact, conducting a thorough budget vs. actuals analysis can provide insight into the company's financial performance in the previous fiscal term.  

Tools And Software To Assist With Budget Creation

Over the last half-century, computational power and programming have drastically increased, making budget creation easier than ever. Financial teams have leveraged bookkeeping software and cloud-based accounting platforms to streamline the budgeting process, making it quicker and easier to consolidate data with fewer delays and discrepancies.  

The budding field of machine learning offers particular promise for budgeting. Today, a few forward-thinking companies have introduced machine learning or artificial intelligence (AI) into the accounting and budgeting world. This AI-driven accounting automates much of the manual data entry, which means you have more reliable data more quickly. For business budget planning, an AI-driven accounting platform can help track revenue streams, chart expenses, and consolidate accounts—all activities that are essential in the budget-building process.

Benefits Of Using Technology In Budgeting

Using the best software and system brings big benefits in budgeting, providing reliable, up-to-date data when you need it. As you budget for a business outlined in the steps above, there are several spots where human data entry could corrupt the data. Humans make mistakes when they get tired; computers don't. Likewise, even the best human-produced data takes time to compile and align the numbers in consistent formats. With automated accounting, budget building is simplified since you have trustworthy, timely numbers ready when you are.

Implement Business Budget Best Practices For Financial Success

Whether your startup is just finding seed money or has been bearing fruit for years, building a workable budget and following it offers your company the best chance to reap the rewards. By using solid documents to estimate fixed and variable costs, you can build a budget that preemptively funds day-to-day operations, contingency accounts, and one-time expenses. Just be sure to consolidate the budget into one place so you can monitor and adjust as needed.

Finally, it's helpful to remember that you aren't in this alone. Some accounting tools can streamline operations, making the budgeting process more efficient, while the right software platforms can reduce human manual entry errors through automation. If you want more info or think automation might be a powerful tool in building your budget, chat with a Fractional CFO.