How to Craft & Manage a Small Business Budget

For entrepreneurs and small business owners, few things are as crucial to success as financial management. A well-structured budget is like a roadmap, guiding the business towards growth.

Whether you're just starting out or an established business owner, learning the art of budgeting can be difficult. And often, it's the difference between business success and failure.

Budgeting is often a struggle for many organisations with otherwise solid ideas and strategies for success.

This piece will explore the essential components of creating, managing, and optimising a business budget. 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 embarking on your financial journey, it's essential to understand what ingredients go into your budget recipe. Consider these key components to see if your initial plan is truly viable:

Revenue projection: Begin by forecasting your revenue. What's your potential revenue growth over a set period of time? Be realistic and conservative, factoring in historical data and market trends.

Expenses breakdown: Divide your expenses into categories. These could include operation costs (rent, utilities, office supplies), marketing expenses (advertising, website maintenance), personnel expenses (salaries, benefits), and more. Remember to include fixed costs, variable costs, and a set amount each month if you need to pay off debt.

One-time costs: Remember to account for significant one-time expenses, such as equipment purchases or facility renovations.

Taxes & regulatory fees: Be sure to set aside funds for taxes. This is so you can pay income tax and Value Added Tax (VAT) in accordance with UK regulations. If you're a sole trader, you'll need to consider saving money separately from your personal finances. This will help when you do your tax return.

Contingency fund: Allocate a portion of your budget as an emergency fund for unforeseen expenses or emergencies.

Crafting your budget: how-to

Creating a budget may sound daunting, but breaking it down into manageable steps can make the process less scary:

Research and data collection: Gather historical financial data, market insights, and industry benchmarks. These will help you make informed projections and decisions.

Set realistic goals: Define clear, achievable financial goals for your business. These could be revenue targets, profit margins, or expense reduction goals.

Allocate funds: Distribute your projected revenue across different expense categories. Assign percentages based on historical data, industry standards, and your specific business needs.

Continuous review & refinement: Your budget isn't set in stone. Regularly review and adjust it as circumstances change. This flexibility ensures that your budget remains a relevant and reliable tool.

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: Keep a close eye on your cash flow. Delayed payments from clients or unexpected expenses can disrupt your budget. Maintaining a healthy cash flow ensures your business stays afloat.

Prioritize spending: Not all expenses are created equal. Identify and prioritize essential expenditures that directly contribute to your business's growth and profitability.

Limit variance: Strive to minimize variance between your budgeted amounts and actual expenditures. Analyse any significant discrepancies and adjust your strategy as needed.

Mindful considerations for small business owners

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. Over-estimating 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 & 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 & 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.

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 take care to 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.