How to Craft & Manage a Small Business Budget

Proper financial management is one key to success for small business owners. A well-structured business budget acts like a roadmap, guiding you toward your goals and helping you avoid pitfalls.

Many businesses, even those with great ideas, fail because they don’t pay enough attention to their budget. That’s why understanding how to create and manage a small business budget can make the difference between success and failure.

In this guide, we’ll break down how to create and manage a budget, what to include in your financial plan, and provide practical business budgeting tips.

If you're a small business owner without the luxury of a finance team, this guide will explain every step.

Building your budget: what goes in?

Before you start building a small business budget, it’s important to know what needs to be included. Here are the key parts of your financial plan:

Revenue projection

Start by estimating how much money you expect to make. This is your revenue projection. Be realistic—look at past sales, market trends, and any other factors that might affect how much money your business brings in.

Expenses breakdown

Break down your expenses into categories. You’ll need to cover:

Operational costs: These are your day-to-day expenses, like rent, utilities, and office supplies.
Marketing expenses: Set money aside for advertising, website maintenance, and other marketing efforts.
Personnel expenses: Don’t forget to budget for salaries, employee benefits, and other staff-related costs.
Debt repayment: If you’ve borrowed money, make sure to include loan payments in your budget.

One-time costs

Some expenses don’t happen regularly but are important to plan for. For example, buying new equipment or renovating your office. These are one-time costs that need to be part of your budget.

Taxes and regulatory fees

Make sure you set aside money for taxes, including income tax and VAT. As a small business in the UK, you’ll need to save for tax payments based on your earnings. Sole traders should separate their business and personal finances for easier tax returns.

Contingency fund

It’s smart to have a backup plan for unexpected costs. Setting aside a bit of money for emergencies is a great way to keep your budget on track.

By understanding these basic components, you’ll have a solid foundation to start creating a business budget.

How to craft your small business budget

“So, how do I create a budget for my small business?”

The process might seem tough, but by breaking it into small steps, it becomes much easier:

1. Research and data collection

Start by gathering information about your past financial performance, market trends, and any industry data you can find. This will help you make educated guesses when creating your small business budget.

2. Set realistic goals

Think about what you want your business to achieve. These goals could be things like hitting a certain revenue target or cutting down on expenses. Make sure your goals are realistic and achievable.

3. Allocate funds

Now it’s time to divide your projected revenue across different categories. Use your expenses breakdown to figure out how much you’ll spend on rent, utilities, marketing, staff, and more.

4. Review and refine

Your budget isn’t set in stone. It should be flexible and change as your business grows. Keep checking your budget regularly to make sure it still fits your business needs.

Managing your budget: day-to-day

Managing your budget is an ongoing process that requires diligence and attention to detail. Here's how to keep your budget on track:

Monitor expenses: Regularly track your expenses against the budget. Tools like spreadsheets, accounting software, or mobile apps can help you stay organised.
Cash flow management: Monitor your cash flow closely. Delayed payments from clients or unexpected expenses can disrupt your budget. Maintaining a healthy cash flow ensures your business stays afloat.
Prioritise spending: Not all expenses are created equal. Identify and prioritise essential expenditures that directly contribute to your business's growth and profitability.
Limit variance: Strive to minimise variance between your budgeted amounts and actual expenditures. Analyse any significant discrepancies and adjust your strategy as needed.

Tips for budgeting in small businesses

Navigating the realm of budgeting as a small business owner requires mindfulness and strategic thinking:

Start small & scale: If you're new to budgeting, begin with a simplified version. As your comfort and expertise grow, gradually introduce more complex elements to your budget.
Be realistic: While optimism is typical for entrepreneurs, be realistic when projecting revenue and setting goals. Overestimating can lead to disappointment and financial strain.
Embrace frugality: Especially in the early stages, practice frugality. Seek cost-effective solutions and explore ways to achieve more with fewer resources.
Plan for seasonal shifts: If your business experiences seasonal fluctuations, plan accordingly. Build a financial cushion during peak periods to sustain you during lean months.

Allocating resources: where should your money go?

While the allocation of resources depends on your business's nature and goals, consider these general guidelines for small business budget allocation:

Operational costs: Allocate about 30-35% of your budget to cover rent, utilities, office supplies, and other essential operational expenses.
Personnel expenses: Dedicate around 25-30% of your budget to salaries, benefits, and other employee-related costs.
Marketing and sales: Allocate 15-20% for marketing, advertising, and sales efforts to attract and retain customers.
Product or service development: Set aside 5-10% for research, development, and improvements to your offerings.
Contingency fund: Allocate 5-10% for unexpected expenses or emergencies.
Taxes and regulatory fees: Ensure you earmark the necessary funds for taxes. Typically you'll need around 20-25% of your budget, depending on your business structure and tax regulations.

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A word of advice

Creating and managing a budget for your small business in the UK may seem like a daunting task. This is true whether you've just set up a business or have been going for a few years. And even more so without the guidance of an accountant or finance team.

However, armed with the proper knowledge and approach, you can use your budget as a powerful tool for financial success.

By understanding the core parts of a budget, you can steer your business toward stability and growth. Remember, your budget isn't just a spreadsheet; it's your financial compass.

Your business budget is as unique as your business

External sources of advice are helpful, but avoid copying the budget plans of another organisation. While some companies might be similar to yours, each will have distinct needs and challenges.

Creating a budget and revenue forecasting is often dependent on the type of business structure. If you were to copy their approach, challenges would arise over time. Creating and testing your budget might be time-consuming, but the rewards are worthwhile.

For more about how to manage your business' finances, check out our collection of finance articles.

About the author

Lauren Wakeling is the UK Country Manager at CoursesOnline. She holds the ultimate responsibility for all of the company's UK operations. With extensive experience, she creates and manages budgets as the company aims to expand its online learning presence.

How to Craft & Manage a Small Business Budget

Whether you're a sole trader, a limited company, or just starting a business, managing a business budget can be complex. This essential guide to budget management and allocation is an ideal blueprint for business owners.