A budget is a plan for your money: what you expect to earn and spend each month. It turns "I hope we are fine" into a number you can check, and it shows trouble while there is still time to act.
The categories
- Revenue: what you expect to sell each month.
- Direct costs: materials, stock, or freelancers for specific jobs.
- Fixed costs: rent, software, insurance, phone. They stay the same each month.
- Variable costs: marketing, travel, packaging. They change with activity.
- Owner pay: what you take for yourself.
- Tax set aside.
- Buffer: money kept for surprises.
A template
Revenue: sales ______
Direct costs: materials or stock ______
Gross profit: revenue minus direct costs ______
Fixed costs: rent ______, software and subscriptions ______, insurance ______
Variable costs: marketing ______, travel ______
Owner pay: ______
Tax set aside: ______
What is left: gross profit minus everything below it ______
A spreadsheet works well: put each line above in its own row, add one column per month, and use a formula for each total.
Build it in four steps
- List every cost. Go through three months of bank statements. Most owners find costs they forgot.
- Estimate revenue cautiously. Base it on past months if you have them. If you are new, plan for fewer sales than you hope.
- Add owner pay and tax. A budget that leaves these out looks better than it is. See how to pay yourself.
- Check what is left. If the bottom line is negative, change something now: costs, prices or the plan.
Use it every month
Once a month, add a column for what actually happened next to what you planned. Look at the biggest differences. Were sales lower? Did a cost creep up? Adjust the rest of the year based on what you learn.
Budget vs cash flow
A budget shows whether the year should be profitable. A cash flow forecast shows whether you will have the cash on the day bills are due. You need both. See how to improve cash flow.
Know your break-even point
Your budget gives you the numbers to work out how much you must sell to cover all costs. There is a simple formula in break-even point. It is one of the most useful numbers a small business can know.