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How to Create a Business Budget for Your Small Business

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A business budget estimates future revenue and expenses in detail, so that you can see whether you’re on track to meet financial expectations for the month, quarter or year. Think of your budget as a point of comparison — you run your actual numbers against it to determine if you’re over or under budget.

From there, you can make informed business decisions and pivot accordingly. For example, maybe you find that your expenses are over budget for the quarter, so you may hold off on a large equipment purchase.

Here’s a step-by-step guide for creating a business budget, along with why budgets are crucial to running a successful business.

» MORE: What is accounting? Definition and basics, explained

QuickBooks Online

How does a business budget work?

Budgeting uses past months’ numbers to help you make financially conservative projections for the future and wiser business decisions for the present. If you’ve had a few bad months and predict another slow one, you can prepare to minimize expenses where possible. If business has been booming and you’re bringing in new customers, maybe you invest in buying more inventory to satisfy increased demand.

Creating a business budget from scratch can feel tedious, but you might already have access to tools that can help simplify the process. Your small-business accounting software is a good place to start, since it houses your business’s financial data and may offer basic budgeting reports.

To create a budget in QuickBooks Online , for example, you break down your estimated income and expenses across each area of your business. Then, the software calculates figures like gross profit, net operating income and net income for you.

You can then compare actual versus projected figures side by side by running a Budget vs. Actuals report. Businesses that need more in-depth features, like cash flow forecasting or the ability to use different projection methods, might subscribe to business budgeting software in addition to accounting software.

If your small business doesn’t have access to these features or has simple financials, you can download free small-business budget templates to manually create and track your budget. Regardless of which option you choose, your business will likely benefit from hiring an accountant to help manage your budget, course-correct when the business gets off track, and make sure taxes are being paid correctly.

Why is a business budget important?

A business budget encourages you to look beyond next week and next month to next year, or even the next five years.

Creating a budget can help your business do the following:

Maximize efficiency. 

Establish a financial plan that helps your business reach its goals. 

Point out leftover funds that you can reinvest.

Predict slow months and keep you out of debt.

Estimate what it will take to become profitable.

Provide a window into the future so you can prepare accordingly.

Creating a business budget will make operating your business easier and more efficient. A business budget can also help ensure you’re spending money in the right places and at the right time to stay out of debt.

How to create a business budget in 6 steps

The longer you’ve been in business, the more data you’ll have to inform your forward-looking budget. If you run a startup, however, you’ll want to do extensive research into typical costs for businesses in your industry, so that you have working estimates for revenue and expenses.

From there, here’s how to put together your business budget:

1. Examine your revenue

One of the first steps in any budgeting exercise is to look at your existing business and find all of your revenue sources. Add all those income sources together to determine how much money comes into your business monthly. It’s important to do this for multiple months and preferably for at least the previous 12 months, provided you have that much data available.

Notice how your business’s monthly income changes over time and try to look for seasonal patterns. Your business might experience a slump after the holidays, for example, or during the summer months. Understanding these seasonal changes will help you prepare for the leaner months and give you time to build a financial cushion.

Then, you can use those historic numbers and trends to make revenue projections for future months. Make sure to calculate for revenue, not profit. Your revenue is the money generated by sales before expenses are deducted. Profit is what remains after expenses are deducted.

2. Subtract fixed costs

The second step for creating a business budget involves adding up all of your historic fixed costs and using them to reliably predict future ones. Fixed costs are those that stay the same no matter how much income your business is generating. They might occur daily, weekly, monthly or yearly, so make sure to get as much data as you can.

Examples of fixed costs within your business might include:

Debt repayment.

Employee salaries.

Depreciation of assets.

Property taxes.

Insurance .

Once you’ve identified your business’s fixed costs, you’ll subtract those from your income and move to the next step.

3. Subtract variable expenses

As you compile your fixed costs, you might notice other expenses that aren’t as consistent. Unlike fixed costs, variable expenses change alongside your business’s output or production. Look at how they’ve fluctuated over time in your business, and use that information to estimate future variable costs. These expenses get subtracted from your income, too.

Some examples of variable expenses are:

Hourly employee wages.

Owner’s salary (if it fluctuates with profit). 

Raw materials.

Utility costs that change depending on business activity.

During lean months, you’ll probably want to lower your business’s variable expenses. During profitable months when there’s extra income, however, you may increase your spending on variable expenses for the long-term benefit of your business.

4. Set aside a contingency fund for unexpected costs

When you’re creating a business budget, make sure you put aside extra cash and plan for contingencies.

Although you might be tempted to spend surplus income on variable expenses, it’s smart to establish an emergency fund instead, if possible. That way, you’ll be ready when equipment breaks down and needs replacing, or if you have to quickly replace inventory that's damaged unexpectedly.

5. Determine your profit

Add up all of your projected revenue and expenses for each month. Then, subtract expenses from revenue. You may also see the resulting number referred to as net income . If you end up with a positive number, you can expect to make a profit. If not, that’s a loss — and that can be OK, too. Small businesses aren’t necessarily profitable every month, let alone every year. This is especially true when your business is just starting out. Compare your projected profits to past profits to confirm whether they’re realistic.

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6. Finalize your business budget

Are the resulting profits enough to work with, or is your business overspending? This is your opportunity to set spending and earning goals for each month, quarter and year. These goals should be realistic and achievable. If they don’t line up with your projections, make sure to establish a strategy for making up the difference.

As time goes on, regularly compare your actual numbers to your budget to determine whether your business is meeting those goals, and course correct if necessary.

» MORE: Ways your small business can spend smarter

A business budget projects future revenue and expenses so you can create a smart, realistic spending plan. As the year progresses, comparing your actual numbers against your budget can help you hold your business accountable and make sure it reaches its financial goals.

A business budget includes projected revenue, fixed costs, variable costs and the resulting profits. You can also factor in contingency funds for unforeseen circumstances like equipment failure.

On a similar note...

How to Write a Small Business Financial Plan

Noah Parsons

3 min. read

Updated January 3, 2024

Creating a financial plan is often the most intimidating part of writing a business plan. It’s also one of the most vital. Businesses with well-structured and accurate financial statements in place are more prepared to pitch to investors, receive funding, and achieve long-term success.

Thankfully, you don’t need an accounting degree to successfully put your budget and forecasts together. Here is everything you need to include in your financial plan along with optional performance metrics, specifics for funding, and free templates.

• Key components of a financial plan

A sound financial plan is made up of six key components that help you easily track and forecast your business financials. They include your:

Sales forecast

What do you expect to sell in a given period? Segment and organize your sales projections with a personalized sales forecast based on your business type.

Subscription sales forecast

While not too different from traditional sales forecasts—there are a few specific terms and calculations you’ll need to know when forecasting sales for a subscription-based business.

Expense budget

Create, review, and revise your expense budget to keep your business on track and more easily predict future expenses.

How to forecast personnel costs

How much do your current, and future, employees’ pay, taxes, and benefits cost your business? Find out by forecasting your personnel costs.

Profit and loss forecast

Track how you make money and how much you spend by listing all of your revenue streams and expenses in your profit and loss statement.

Cash flow forecast

Manage and create projections for the inflow and outflow of cash by building a cash flow statement and forecast.

Balance sheet

Need a snapshot of your business’s financial position? Keep an eye on your assets, liabilities, and equity within the balance sheet.

What to include if you plan to pursue funding

Do you plan to pursue any form of funding or financing? If the answer is yes, then there are a few additional pieces of information that you’ll need to include as part of your financial plan.

Highlight any risks and assumptions

Every entrepreneur takes risks with the biggest being assumptions and guesses about the future. Just be sure to track and address these unknowns in your plan early on.

Plan your exit strategy

Investors will want to know your long-term plans as a business owner. While you don’t need to have all the details, it’s worth taking the time to think through how you eventually plan to leave your business.

• Financial ratios and metrics

With all of your financial statements and forecasts in place, you have all the numbers needed to calculate insightful financial ratios. While these metrics are entirely optional to include in your plan, having them easily accessible can be valuable for tracking your performance and overall financial situation.

Common business ratios

Unsure of which business ratios you should be using? Check out this list of key financial ratios that bankers, financial analysts, and investors will want to see.

Break-even analysis

Do you want to know when you’ll become profitable? Find out how much you need to sell to offset your production costs by conducting a break-even analysis.

How to calculate ROI

How much could a business decision be worth? Evaluate the efficiency or profitability by calculating the potential return on investment (ROI).

• Financial plan templates and tools

Download and use these free financial templates and calculators to easily create your own financial plan.

Sales forecast template

Download a free detailed sales forecast spreadsheet, with built-in formulas, to easily estimate your first full year of monthly sales.

Download Template

Accurate and easy financial forecasting

Get a full financial picture of your business with LivePlan's simple financial management tools.

Get Started

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• What to include for funding

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The Best Free Business Budget Templates

Published: October 12, 2023

Business budgets are a source of truth for your income and expenses. That includes all the money you spend — from A/B testing your marketing campaigns to your monthly office rent.

While organizing the numbers may sound difficult, using a business budget template makes the process simple. Plus, there are thousands of business budget templates for you to choose from.

We’ll share seven budget templates that can help organize your finances. But first, you’ll learn about different types of business budgets and how to create one.

What is a Business Budget?

A business budget is a spending plan that estimates the revenue and expenses of a business for a period of time, typically monthly, quarterly, or yearly.

The business budget follows a set template, which you can fill in with estimated revenues, plus any recurring or expected business expenses.

For example, say your business is planning a website redesign. You'd need to break down the costs by category: software, content and design, testing, and more.

Having a clear breakdown will help you estimate how much each category will cost and compare it with the actual costs.

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Types of Budgets for a Business

Master budget, operating budget, cash budget, static budget, departmental budget, capital budget, labor budget, project budget.

Business budgets aren’t one size fits all. In fact, there are many different types of budgets that serve various purposes. Let’s dive into some commonly used budgets:

Think of a master budget as the superhero of budgets — it brings together all the individual budgets from different parts of your company into one big, consolidated plan. It covers everything from sales and production to marketing and finances.

It includes details like projected revenues, expenses, and profitability for each department or business unit. It also considers important financial aspects like cash flow, capital expenditures, and even creates a budgeted balance sheet to show the organization's financial position.

The master budget acts as a guide for decision-making, helps with strategic planning, and gives a clear picture of the overall financial health and performance of your company. It's like the master plan that ties everything together and helps the organization move in the right direction.

Your operating budget helps your company figure out how much money it expects to make and spend during a specific period, usually a year. It not only predicts the revenue your business will bring in, but also outlines expenses it will need to cover, like salaries, rent, bills, and other operational costs.

By comparing your actual expenses and revenue to the budgeted amounts, your company can see how it's performing and make adjustments if needed. It helps keep things in check, allowing your business to make wise financial decisions and stay on track with its goals.

Free Business Budget Templates

Manage your business, personal, and program spend on an annual, quarterly, and monthly basis.

• Personal Budget Template
• Annual Budget Template
• Program Budget Template

You're all set!

Click this link to access this resource at any time.

A cash budget estimates the cash inflows and outflows of your business over a specific period, typically a month, quarter, or year. It provides a detailed projection of cash sources and uses, including revenue, expenses, and financing activities.

The cash budget helps you effectively manage your cash flow, plan for cash shortages or surpluses, evaluate the need for external financing, and make informed decisions about resource allocation.

By utilizing a cash budget, your business can ensure it has enough cash on hand to meet its financial obligations, navigate fluctuations, and seize growth opportunities.

A static budget is a financial plan that remains unchanged, regardless of actual sales or production volumes.

It’s typically created at the beginning of a budget period and doesn’t account for any fluctuations or changes in business conditions. It also assumes that all variables, such as sales, expenses, and production levels, will remain the same throughout the budget period.

While a static budget provides a baseline for comparison, it may not be realistic for businesses with fluctuating sales volumes or variable expenses.

A departmental budget focuses on the financial aspects of a specific department within your company, such as sales, marketing or human resources.

When creating a departmental budget, you may look at revenue sources like departmental sales, grants, and other sources of income. On the expense side, you consider costs such as salaries, supplies, equipment, and any other expenses unique to that department.

The goal of a departmental budget is to help the department manage its finances wisely. It acts as a guide for making decisions and allocating resources effectively. By comparing the actual numbers to the budgeted amounts, department heads can see if they're on track or if adjustments need to be made.

A capital budget is all about planning for big investments in the long term. It focuses on deciding where to spend money on things like upgrading equipment, maintaining facilities, developing new products, and hiring new employees.

The budget looks at the costs of buying new stuff, upgrading existing things, and even considers depreciation, which is when something loses value over time. It also considers the return on investment, like how much money these investments might bring in or how they could save costs in the future.

The budget also looks at different ways to finance these investments, whether it's through loans, leases, or other options. It's all about making smart decisions for the future, evaluating cash flow, and choosing investments that will help the company grow and succeed.

A labor budget helps you plan and manage the costs related to your employees. It involves figuring out how much your business will spend on wages, salaries, benefits, and other labor-related expenses.

To create a labor budget, you'll need to consider factors like how much work needs to be done, how many folks you'll need to get it done, and how much it'll all cost. This can help your business forecast and control labor-related expenses and ensure adequate staffing levels.

By having a labor budget in place, your business can monitor and analyze your labor costs to make informed decisions and optimize your resources effectively.

A project budget is the financial plan for a specific project.

Let's say you have an exciting new project you want to tackle. A project budget helps you figure out how much money you'll need and how it will be allocated. It covers everything from personnel to equipment and materials — basically, anything you'll need to make the project happen.

By creating a project budget, you can make sure the project is doable from a financial standpoint. It helps you keep track of how much you planned to spend versus how much you actually spend as you go along. That way, you have a clear idea of whether you're staying on track or if there are any financial challenges that need attention.

How to Create a Business Budget

While creating a business budget can be straightforward, the process may be more complex for larger companies with multiple revenue streams and expenses.

No matter the size of your business, here are the basic steps to creating a business budget.

1. Gather financial data.

Before you create a business budget, it’s important to gather insights from your past financial data. By looking at things like income statements, expense reports, and sales data, you can spot trends, learn from past experiences, and see where you can make improvements.

Going through your financial history helps you paint a true picture of your income and expenses. So, when you start creating your budget, you can set achievable targets and make sure your estimates match what's actually been happening in your business.

2. Find a template, or make a spreadsheet.

There are many free or paid budget templates online. You can start with an already existing budget template. We list a few helpful templates below.

You may also opt to make a spreadsheet with custom rows and columns based on your business.

3. Fill in revenues.

Once you have your template, start by listing all the sources of your business’ income. With a budget, you’re planning for the future, so you’ll also need to forecast revenue streams based on previous months or years. For a new small business budget, you’ll rely on your market research to estimate early revenue for your company.

When you estimate your revenue , you're essentially figuring out how much money you have to work with. This helps you decide where to allocate your resources and which expenses you can fund.

4. Subtract fixed costs for the time period.

Fixed costs are the recurring costs you have during each month, quarter, or year. Examples include insurance, rent for office space, website hosting, and internet.

The key thing to remember about fixed costs is that they stay relatively stable, regardless of changes in business activity. Even if your sales decrease or production slows down, these costs remain the same.

However, it's important to note that fixed costs can still change over the long term, such as when renegotiating lease agreements or adjusting employee salaries.

5. Consider variable costs.

Variable costs will change from time to time. Unlike fixed costs, variable costs increase or decrease as the level of production or sales changes.

Examples include raw materials needed to manufacture your products, packaging and shipping costs, utility bills, advertising costs, office supplies, and new software or technology.

You may always need to pay some variable costs, like utility bills. However, you can shift how much you spend toward other expenses, like advertising costs, when you have a lower-than-average estimated income.

6. Set aside time for business budget planning.

Unexpected expenses might come up, or you might want to save to expand your business. Either way, review your budget after including all expenses, fixed costs, and variable costs. Once completed, you can determine how much money you can save. It’s wise to create multiple savings accounts. One should be used for emergencies. The other holds money that can be spent on the business to drive growth.

Fill out the form to get the free templates.

How to manage a business budget.

There are a few key components to managing a healthy business budget.

Budget Preparation

The process all starts with properly preparing and planning the budget at the beginning of each month, quarter, or year. You can also create multiple budgets, some short-term and some long-term. During this stage, you will also set spending limits and create a system to regularly monitor the budget.

Budget Monitoring

In larger businesses, you might delegate budget tracking to multiple supervisors. But even if you’re a one-person show, keep a close eye on your budget. That means setting a time in your schedule each day or week to review the budget and track actual income and expenses. Be sure to compare the actual numbers to the estimates.

Budget Forecasting

With regular budget tracking, you always know how your business is doing. Check in regularly to determine how you are doing in terms of revenue and where you have losses. Find where you can minimize expenses and how you can move more money into savings.

Why is a Budget Important for a Business?

A budget is crucial for businesses. Without one, you could easily be drowning in expenses or unexpected costs.

The business budget helps with several operations. You can use a business budget to keep track of your finances, save money to help you grow the business or pay bonuses in the future, and prepare for unexpected expenses or emergencies.

You can also review your budget to determine when to take the next leap for your business. For example, you might be dreaming of a larger office building or the latest software, but you want to make sure you have a healthy net revenue before you make the purchase.

Best Free Business Budget Templates

1. marketing budget template.

Knowing how to manage a marketing budget can be a challenge, but with helpful free templates like this marketing budget template bundle , you can track everything from advertising expenses to events and more.

This free bundle includes eight different templates, so you can create multiple budgets to help you determine how much money to put toward marketing, plus the return on your investment.

2. Small Business Budget Template

For small businesses, it can be hard to find the time to draw up a budget, but it’s crucial to help keep the business in good health.

Capterra offers a budget template specifically for small businesses. Plus, this template works with Excel. Start by inputting projections for the year. Then, the spreadsheet will project the month-to-month budget. You can input your actual revenue and expenses to compare, making profits and losses easy to spot.

3. Startup Budget Template

What if you don’t have any previous numbers to rely on to create profit and expense estimates? If you are a startup, this Gusto budget template will help you draw up a budget before your business is officially in the market. This will help you track all the expenses you need to get your business up and running, estimate your first revenues, and determine where to pinch pennies.

4. Free Business Budget Template

You might be familiar with Intuit. Many companies, big and small, rely on Intuit’s services like Quickbooks and TurboTax. Even if you don’t use the company’s paid financial services, you can take advantage of Intuit’s free budget template , which works in Google Sheets or Excel.

It features multiple spreadsheet tabs and simple instructions. You enter your revenue in one specific tab and expenses in another. You can also add additional tabs as needed. Then, like magic, the spreadsheet uses the data in the income and expense tabs to summarize the information. This template can even determine net savings and the ending balance.

5. Department Budget Sheet

A mid- to large-size company will have multiple departments, all with different budgetary needs. These budgets will all be consolidated into a massive, company-wide budget sheet. Having a specific template for each department can help teams keep track of spending and plan for growth.

This free template from Template.net works in either document or spreadsheet formats. This budget template can help different departments keep track of their income and spending.

6. Project Budget Template

Every new project comes with expenses. This free budget template from Monday will help your team estimate costs before undertaking a project. You can easily spot if you're going over budget midway through a project so you can adjust.

This template is especially useful for small companies that are reporting budgets to clients and for in-house teams getting buy-in for complex projects.

7. Company Budget Template

Want to keep track of every penny? Use this template from TemplateLab to draw up a detailed budget. The list of expenses includes fixed costs, employee costs, and variable costs. This business template can be especially useful for small businesses that want to keep track of expenses in one, comprehensive document.

Create a Business Budget to Help Your Company Grow

Making your first business budget can be daunting, especially if you have several revenue streams and expenses. Using a budget template can make getting started easy. And, once you get it set up, these templates are simple to replicate.

With little planning and regular monitoring, you can plan for the future of your business.

Editor's note: This post was originally published in September 2021 and has been updated for comprehensiveness.

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A How-To Guide for Creating a Business Budget

Amanda Smith

Reviewed by

September 23, 2022

This article is Tax Professional approved

Most business owners know how important a business budget is when it comes to managing expenses and planning for the future—but in a challenging economic environment like the one we’ve been experiencing, your business budget takes on even greater significance.

With inflation running rampant and the possibility of a recession looming, business owners need to be able to forecast their cash flow, manage their expenses, and plan for the future. Creating a detailed business budget is the first step.

Whether you want to revamp your budgeting method, or you’ve never created a business budget before, this guide will walk you through the process.

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What is a business budget?

A budget is a detailed plan that outlines where you’ll spend your money monthly or annually.

You give every dollar a “job,” based on what you think is the best use of your business funds, and then go back and compare your plan with reality to see how you did.

A budget will help you:

• Forecast what money you expect to earn
• Plan where to spend that revenue
• See the difference between your plan and reality

What makes a good budget?

The best budgets are simple and flexible. If circumstances change (as they do), your budget can flex to give you a clear picture of where you stand at all times.

Every good budget should include seven components:

1. Your estimated revenue

This is the amount you expect to make from the sale of goods or services. It’s all of the cash you bring in the door, regardless of what you spent to get there. This is the first line on your budget. It can be based on last year’s numbers or (if you’re a startup ), based on industry averages.

2. Your fixed costs

These are all your regular, consistent costs that don’t change according to how much you make—things like rent, insurance, utilities, bank fees, accounting and legal services, and equipment leasing.

Further reading: Fixed Costs (Everything You Need to Know)

3. Your variable costs

These change according to production or sales volume and are closely related to “ costs of goods sold ,” i.e., anything related to the production or purchase of the product your business sells. Variable costs might include raw materials, inventory, production costs, packaging, or shipping. Other variable costs can include sales commission, credit card fees, and travel. A clear budget plan outlines what you expect to spend on all these costs.

The cost of salaries can fall under both fixed and variable costs. For example, your core in-house team is usually associated with fixed costs, while production or manufacturing teams—anything related to the production of goods—are treated as variable costs. Make sure you file your different salary costs in the correct area of your budget.

Further reading: Variable Costs (A Simple Guide)

4. Your one-off costs

One-off costs fall outside the usual work your business does. These are startup costs like moving offices, equipment, furniture, and software, as well as other costs related to launch and research.

5. Your cash flow

Cash flow is all money traveling into and out of a business. You have positive cash flow if there is more money coming into your business over a set period of time than going out. This is most easily calculated by subtracting the amount of money available at the beginning of a set period of time and at the end.

Since cash flow is the oxygen of every business, make sure you monitor this weekly, or at least monthly. You could be raking it in and still not have enough money on hand to pay your suppliers.

6. Your profit

Profit is what you take home after deducting your expenses from your revenue. Growing profits mean a growing business. Here you’ll plan out how much profit you plan to make based on your projected revenue, expenses, and cost of goods sold. If the difference between revenue and expenses (aka “ profit margins ”) aren’t where you’d like them to be, you need to rethink your cost of goods sold and consider raising prices .

Or, if you think you can’t squeeze any more profit margin out of your business, consider boosting the Advertising and Promotions line in your budget to increase total sales.

7. A budget calculator

A budget calculator can help you see exactly where you stand when it comes to your business budget planning. It might sound obvious, but getting all the numbers in your budget in one easy-to-read summary is really helpful.

In your spreadsheet, create a summary page with a row for each of the budget categories above. This is the framework of your basic budget. Then, next to each category, list the total amount you’ve budgeted. Finally, create another column to the right—when the time period ends, use it to record the actual amounts spent in each category. This gives you a snapshot of your budget that’s easy to find without diving into layers of crowded spreadsheets.

See the sample below.

Pro tip: link the totals on the summary page to the original sums in your other budget tabs . That way when you update any figures, your budget summary gets updated at the same time. The result: your very own budget calculator.

You can also check out this simple Startup Cost Calculator from CardConnect. It lays out some of the most common expenses that you might not have considered. From there, you can customize a rough budget for your own industry.

Small business budgets for different types of company

While every good budget has the same framework, you’ll need to think about the unique budgeting quirks of your industry and business type.

Seasonal businesses

If your business has a busy season and a slow season, budgeting is doubly important.

Because your business isn’t consistent each month, a budget gives you a good view of past and present data to predict future cash flow . Forecasting in this way helps you spot annual trends, see how much money you need to get you through the slow months, and look for opportunities to cut costs to offset the low season. You can use your slow season to plan for the next year, negotiate with vendors, and build customer loyalty through engagement.

Don’t assume the same thing will happen every year, though. Just like any budget, forecasting is a process that evolves. So start with what you know, and if you don’t know something—like what kind of unexpected costs might pop up next quarter— just give it your best guess . Better to set aside money for an emergency that doesn’t happen than to be blindsided.

Ecommerce businesses

The main budgeting factor for ecommerce is shipping. Shipping costs (and potential import duties) can have a huge impact.

Do you have space in your budget to cover shipping to customers? If not, do you have an alternative strategy that’s in line with your budget—like flat rate shipping or real-time shipping quotes for customers? Packaging can affect shipping rates, so factor that into your cost of goods sold too. While you’re at it, consider any international warehousing costs and duties.

You’ll also want to create the best online shopping experience for your customers, so make sure you include a good web hosting service, web design, product photography, advertising, blogging, and social media in your budget.

Inventory businesses

If you need to stock up on inventory to meet demand, factor this into your cost of goods sold. Use the previous year’s sales or industry benchmarks to take a best guess at the amount of inventory you need. A little upfront research will help ensure you’re getting the best prices from your vendors and shipping the right amount to satisfy need, mitigate shipping costs, and fit within your budget.

The volume of inventory might affect your pricing. For example, if you order more stock, your cost per unit will be lower, but your overall spend will be higher. Make sure this is factored into your budget and pricing, and that the volume ordered isn’t greater than actual product demand.

You may also need to include the cost of storage solutions or disposal of leftover stock.

Custom order businesses

When creating custom ordered goods, factor in labor time and cost of operations and materials. These vary from order to order, so make an average estimate.

Budgeting is tricky for startups—you rarely have an existing model to use. Do your due diligence by researching industry benchmarks for salaries, rent, and marketing costs. Ask your network what you can expect to pay for professional fees, benefits, and equipment. Set aside a portion of your budget for advisors—accountants, lawyers, that kind of thing. A few thousand dollars upfront could save you thousands more in legal fees and inefficiencies later on.

This is just scratching the surface, and there’s plenty more to consider when creating a budget for a startup. This business startup budget guide from The Balance is a great start.

Service businesses

If you don’t have a physical product, focus on projected sales, revenue, salaries, and consultant costs. Figures in these industries—whether accounting, legal services, creative, or insurance—can vary greatly, which means budgets need flexibility. These figures are reliant on the number of people required to provide the service, the cost of their time, and fluctuating customer demand.

Small business budgeting templates

A business budget template can be as simple as a table or as complex as a multi-page spreadsheet. Just make sure you’re creating something that you’ll actually use.

Create your budget yearly—a 12-month budget is standard fare—with quarterly or monthly updates and check-ins to ensure you’re on track.

Here are some of our favorite templates for you to plug into and get rolling.

• The Balance has a clear table template that lists every budget item, the budgeted amount, the actual amount, and the difference between the two. Use this one if you’re looking to keep it simple.
• Capterra has both monthly and annual breakdowns in their Excel download. It’s straightforward, thorough, and fairly foolproof.
• Google Sheets has plenty of budget templates hiding right under your nose. They’re easy to use, and they translate your figures into clear tables and charts on a concise, visual summary page.
• Smartsheet has multiple resources for small businesses, including 12-month budget spreadsheets, department budget templates, projection templates, project-by-project templates, and startup templates. These templates are ideal if you’re looking for a little more detail.
• Scott’s Marketplace is a blog for small businesses. Their budget template comes with step-by-step instructions that make it dead simple for anyone.
• Vertex42 focuses on Excel spreadsheets and offers templates for both product-based and service-based businesses, as well as a business startup costs template for anyone launching a new business.

Budgeting + bookkeeping = a match made in heaven

Making a budget is kind of like dreaming: it’s mostly pretend. But when you can start pulling on accurate historical financials to plan the upcoming year, and when you can check your budget against real numbers, that’s when budgets start to become useful.

The only way to get accurate financial data is through consistent bookkeeping.

Don’t have a regular bookkeeping process down pat? Check out our free guide, Bookkeeping Basics for Entrepreneurs . We’ll walk you through everything you need to know to get going yourself, for free.

If you need a bit more help, get in touch with us. Bookkeeping isn’t for everyone, especially when you’re also trying to stay on top of a growing business—but at Bench, bookkeeping is what we do best.

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Step-by-Step Guide to Creating a Business Budget Plan

A well-structured business budget plan is crucial for success. It serves as a financial stability and growth roadmap, allowing companies to allocate resources wisely and make informed decisions. Understanding the basics of business budgeting is essential for any entrepreneur or business owner looking to create a solid financial plan to help them achieve their goals.

The Importance of Business Budget Planning

Business budget planning is not just about crunching numbers; it's about setting clear financial goals and outlining strategies to achieve them. It provides a framework for managing expenses, maximizing revenue , and ensuring the long-term sustainability of a company. Without a well-thought-out budget plan, businesses may struggle to stay afloat in today's competitive market.

Understanding the Basics of Business Budget

At its core, a business budget is an estimate of future income and expenses based on historical data and current trends. It involves identifying all sources of revenue and categorizing various types of expenses, including fixed costs (rent, salaries) and variable costs (utilities, marketing). Understanding these fundamental concepts is essential for creating an effective budget plan.

Benefits of Creating a Business Budget Plan

The benefits of creating a business budget plan are manifold. It clarifies where money is being spent and helps identify areas where costs can be reduced or investments can be made to drive growth. Additionally, having a well-structured budget plan can instill confidence in stakeholders, such as investors or lenders who want to see evidence of sound financial management .

Now that we've laid the groundwork for understanding the importance of business budget planning and its basics, let's delve deeper into the process by assessing your financial situation and setting achievable goals.

Assessing Your Financial Situation

Sarah Horsman Template from Strikingly

Now that you understand the importance of business budget planning, it's time to assess your financial situation. This involves analyzing your current revenue and expenses, identifying fixed and variable costs, and projecting future income and expenses.

Analyzing Current Revenue and Expenses

You must clearly understand your current revenue and expenses to create a business budget plan that works for your company . This involves looking at your sales figures, incoming cash flow, and all the money going out of your business. By analyzing these numbers, you can gain valuable insights into where your money is coming from and where it's going.

Identifying Fixed and Variable Costs

When creating a business budget plan, it's crucial to distinguish between fixed and variable costs. Fixed costs, such as rent or salaries, remain constant regardless of your level of production or sales. Variable costs, like raw materials or shipping expenses, fluctuate with production levels or sales volume. Identifying these costs will help you make more accurate financial projections.

Projecting Future Income and Expenses

Looking ahead is an essential part of business budget planning. You can anticipate potential financial challenges or opportunities by projecting future income and expenses based on historical data and market trends. This will enable you to make informed decisions about resource allocation and strategic investments.

Remember that creating a business budget plan is not just about crunching numbers; it's about setting the stage for sustainable growth and success in the long run.

Setting Financial Goals

Now that you understand the basics of business budget planning, it's time to set your financial goals . Establishing short-term and long-term objectives can create a roadmap for your business's financial success. Whether increasing revenue or reducing expenses, having clear goals will guide your budgeting decisions.

Establishing Short-term and Long-term Objectives

To effectively create a business budget plan, it's crucial to establish both short-term and long-term financial objectives. Short-term goals could include reducing overhead costs by a certain percentage within six months, while long-term goals might involve doubling your annual revenue within three years. These objectives provide direction for allocating funds and making strategic financial decisions.

Allocating Funds for Growth and Expansion

One of the key benefits of creating a business budget plan is the ability to allocate funds for growth and expansion. Whether you're looking to invest in new equipment, expand your product line, or open additional locations, setting aside funds in your budget allows you to pursue these opportunities without compromising your financial stability .

Planning for Contingencies and Emergencies

In business, unexpected events can have a significant impact on your finances. Planning for contingencies and emergencies is essential when creating a business budget plan. You can protect your business from potential financial hardships by setting aside a portion of your budget for unforeseen circumstances, such as economic downturns or equipment breakdowns.

Creating the Budget Plan

Now that you understand the importance of business budget planning, it's time to create a solid business budget plan. When choosing the right budgeting method, consider your company's size, industry, and financial goals. Whether it's zero- or activity-based budgeting, select a method that aligns with your business objectives and ensures accurate financial management .

Choosing the Right Budgeting Method

Selecting the right budgeting method is crucial for effective business budget planning. Zero-based budgeting involves justifying every expense from scratch, while activity-based budgeting focuses on cost allocation based on activities. Whichever method you choose, ensure it aligns with your company's financial objectives and provides a clear resource allocation roadmap.

Allocating Funds to Different Departments

When creating a business budget plan, allocating funds to different departments is essential based on their specific needs and priorities. Consider departmental goals, operational requirements, and revenue generation potential when distributing financial resources. This approach ensures each department has the necessary funds to function effectively within the business framework.

Monitoring and Adjusting the Budget as Needed

Once you've allocated funds to different departments in your business budget plan, monitoring and adjusting the budget as needed is essential. Regularly review your financial performance against the set targets and adjust based on changing market conditions or internal dynamics. Flexibility ensures that your business remains agile and responsive to evolving economic landscapes.

By carefully choosing the right budgeting method, allocating funds to different departments thoughtfully, and monitoring and adjusting the budget as needed, you can create a robust business budget plan that sets your company up for long-term success in managing its finances effectively.

Implementing the Budget Plan

Quantum Template from Strikingly

Now that you have created a solid business budget plan, it's time to implement it. This step involves communicating the budget to key stakeholders, training employees on budgetary guidelines, and integrating the budget into daily operations.

Communicating the Budget to Key Stakeholders

It is crucial to inform all relevant stakeholders about the business budget plan. This includes shareholders, managers, and other decision-makers who must know the financial goals and constraints. Clear communication will ensure everyone is on the same page and can work towards common objectives.

Training Employees on Budgetary Guidelines

Employees play a vital role in adhering to the budget plan. Providing them with comprehensive training on budgetary guidelines will help them understand their responsibilities in managing costs and staying within allocated funds. This will empower them to make informed decisions that align with the company's financial objectives.

Integrating the Budget into Daily Operations

Incorporating the business budget plan into daily operations requires a strategic approach. It involves aligning all activities with the financial goals outlined in the budget, ensuring that resources are utilized efficiently, and making adjustments as needed to stay within budgetary limits. This integration fosters a culture of financial responsibility throughout the organization.

By effectively implementing your business budget plan through clear communication, employee training, and seamless integration into daily operations, you can set your company up for financial success while achieving your long-term objectives.

Tracking and Evaluating Performance

Monitoring Budget Variance and Deviations

Once you have implemented your business budget plan, it's crucial to regularly monitor the budget variance and identify any deviations from the projected expenses and revenue. This will help you understand where adjustments need to be made and where you may exceed or fall short of your financial goals.

Conducting Regular Financial Reviews

Regular financial reviews are essential for evaluating the performance of your business budget plan. By conducting these reviews, you can assess whether your actual income and expenses align with what was projected in the budget. This will allow you to make informed decisions on where to allocate funds or where to cut back to stay on track with your financial objectives.

Making Informed Decisions Based on Budget Analysis

Analyzing the data from your business budget plan is key to making informed decisions for your company's future. By understanding how well your budget is performing, you can strategically plan for growth, expansion, and any potential contingencies or emergencies that may arise.

Continuously tracking and evaluating the performance of your business budget plan is vital for maintaining financial stability and achieving long-term success. By closely monitoring variance, conducting regular reviews, and making informed decisions based on budget analysis, you can ensure that your business stays on track toward its financial goals.

Tips for Successfully Implementing Your Business Budget Plan: Striking a Balance Between Dreams and Dollars

Every business owner knows the importance of a budget—it's the roadmap to financial stability and growth. But crafting a brilliant budget is only half the battle. The real test lies in implementation. How do you translate those meticulously planned numbers into tangible results? Here are some key tips to ensure your business budget plan becomes a reality, not just a document gathering dust on a shelf:

1. Set SMART Goals

Your budget shouldn't exist in a vacuum. It should be tightly woven into your business goals. But instead of vague aspirations, set SMART goals: Specific, Measurable, Achievable, Relevant, and Time-bound . This clarity provides a clear direction for allocating resources and tracking progress.

2. Foster Collaboration

Budgeting isn't a solo act. Involve key stakeholders in the process, from department heads to team members. This collaborative approach fosters buy-in, ensures everyone understands their role in achieving financial goals, and harnesses diverse perspectives for smarter decision-making.

3. Embrace Transparency

Open communication is crucial. Share the budget with relevant team members, not just financial experts. This transparency builds trust, empowers employees to make informed decisions, and encourages a culture of financial responsibility.

4. Track and Monitor

Don't let your budget become a static document. Regularly track actual spending against the planned figures. Identify any discrepancies, analyze the causes, and make adjustments as needed. This active monitoring allows you to course-correct before small deviations snowball into major issues.

5. Leverage Technology

Strikingly Landing Page

• Easy to use. Strikingly is a user-friendly platform that is easy to use, even for those without experience in website design .
• Affordable. Strikingly offers a variety of affordable plans to fit any budget.
• Mobile-friendly. Strikingly's websites are mobile-friendly, so you can reach your customers wherever they are.

Strikingly Website on a Mobile Device

• SEO-friendly. Strikingly's websites are SEO-friendly so that you can improve your website's ranking in search results.

Strikingly is a valuable tool to help businesses create and manage their online presence . Strikingly's features can also be helpful for businesses when creating a business budget plan.

6. Review and Adapt

The business landscape is dynamic. Be prepared to adapt your budget as circumstances change. Regularly review your plan, considering market shifts, new opportunities, and unforeseen challenges. A flexible approach ensures your budget remains relevant and responsive to the ever-evolving environment.

7. Celebrate Successes

Don't forget to celebrate your wins! Recognizing positive financial milestones and acknowledging the collective effort motivates everyone and reinforces the importance of adhering to the budget plan.

8. Build a Culture of Accountability

Create a culture where all share financial responsibility. Hold yourself and your team accountable for staying within budget limits. This fosters a sense of ownership and promotes responsible financial behavior across the organization.

9. Communicate Effectively

Regularly communicate budget updates, performance metrics, and any necessary adjustments to the team. This transparency keeps everyone informed, engaged, and empowered to contribute to the business's financial success.

10. Continuously Improve

Never stop learning and evolving. Regularly evaluate your budgeting process, identify areas for improvement, and implement new strategies to optimize your financial management. Remember, a successful budget is a living document, constantly adapting and growing alongside your business.

By following these tips and embracing tools like Strikingly , you can transform your business budget plan from a theoretical framework into a powerful tool for driving growth and achieving your financial aspirations. Remember, successful budgeting is a journey, not a destination. It requires ongoing commitment, collaboration, and a continuous focus on improvement. So, embark on your financial journey confidently and watch your business reach new heights of success.

A well-structured business budget plan can lead to long-term financial stability and growth. It helps identify areas for cost savings, allocate funds for expansion, and plan for contingencies, ultimately leading to improved profitability and sustainability for your business.

Remember that creating a well-structured business budget plan is crucial for the success and sustainability of your business. By following these steps and incorporating these tips into your planning process, you can ensure that your business is on the path to financial success and growth.

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A How-To Guide for Creating a Business Budget

Creating a business budget allows businessmen to find whether their business will have enough revenue to pay off expenses in the future. A perfect budget acts as a root map for a company to ensure that they are proper and are on track with the budget.

A business budget helps firms manage their money efficiently. Preparing a budget to track actual revenue and spending throughout the accounting year helps gain greater control over the expenses. It helps everyone in an organization to work according to a proper plan and manage the expenses of the company.

What is a Business Budget?

A business budget is a detailed plan that states where the company will spend its money. Preparing a budget will allow the company to weigh down its expenses and benefits before committing assets . It also gives the business an idea as to how its future will look like.

Typically a business budget is prepared on an annual basis. But, if required it can also be prepared monthly or quarterly. It is a detailed plan which outlines how, when, and where you are planning to spend your money. A business budget helps the business to keep its costs under control and grow according to the plans.

Creating a perfect business budget helps firms eliminate their wasteful spending, develop plans to expand revenue, and work towards setting productive goals. Proper planning must include an outline of changes that a firm needs to make, potential changes of the market and clients, changes in the competition, operational changes if any, financial performance, investment details, etc.

Purpose of Business Budget

A good business budget serves as a benchmark for the firm to make sure that they are on track with its goals. It is an important instrument that can activate change. A budget can help to ensure the long-term success of your business. Certain points make it a necessity. The purposes of a business budget are as follows:

Forecasting the Earnings of a Business:

Creating a good business budget helps to estimate how much money the business will be able to make in the future as revenue, sales, and profit.

Plan the Expenditure:

Budget acts as a way to assign each job to the business spending so that there will be no unnecessary reason to spend money. Each penny spent will have a reason that eliminates wastage of money.

Holds Yourselves Accountable for Fluctuations:

A budget lets you evaluate the money planned to be spent with the actual money used. This helps you see if you are meeting the desired goals and have achieved the forecasted expectations.

Helps Prepare for Emergencies:

You never know what will come up during the life of a business and so it is always important to plan for the uncertainties in the business. A business budget can help you set aside some money to be used at the time of emergencies.

Attracts Investors Towards the Business:

Investors will need to see how their money will be used in a company. A well-prepared budget will show how a business is organized and committed. This helps the investors to analyze whether their money is used properly.

Helps to Allocate Resources:

Allocating business resources is one of the most critical purposes of preparing a budget . Therefore, it is important to differentiate between needs and wants. Budget planning can help to allocate new funds, reallocate existing funds, or change policies, practices, and priorities.

Steps to Create a Business Budget

Having a realistic business budget can act as a tool to help businesses to minimize cost issues, improve focus, and help efficiently use cash. Before focusing on the preparation of the budget, identify which aspects of the business needs improvement. This helps to decide how the business funds must be used. Based on this setup long and short-term goals are practical and purely based on the capacity of the firm to spend and save. Below are some steps that will help you get an idea of how to create a business budget.

Find Out the Sources of Income:

Do not overestimate the revenue this will lead to borrowing more cash to meet the operational needs of the company. It is better to refer previously recorded revenue of the company this will help to keep things realistic. Find out how much and from where the money is coming into the business. It is made on a monthly, quarterly, or yearly basis. Examine how your monthly income is fluctuating over time and look for seasonal patterns if any. A better idea about these changes will help you prepare for the bad income months by keeping small balances for emergencies.

Determine the Fixed Costs:

After finding out the incomes, it is time to get a hold on the costs of the business. For this start with the fixed costs. Fixed costs are those costs that do not change over time. For example, rent, salaries, tax rates, insurance policies, interest expenses, etc. Review these expenses and see which of them have stayed the same for each of the months. Add all the fixed costs together to get the total fixed costs that are incurred in the business.

Find Out the Variable Costs:

Variable costs are those costs that do not remain fixed and keep on changing month after month. These are the expenses that change in proportion to the production, output, sales, or usage. For example, owner’s salary, office supplies, piece-rate labor wages, commission, etc. When the business is having higher profits than expected then spend more on variables that will help scale up the business. On the other hand, when the profit is lesser than expected, consider cutting the variable costs until the business profit starts increasing.

Calculate One-Time Spends:

One-time spending is those expenses that come into a business without any notice. For example, expenditures incurred to rectify security breaches of computers in an IT company. These arise when you least expect them, and usually, businesses do not have money to settle these expenses. To prevent the fear of unexpected costs make sure to keep some extra money ready with you, this amount of money acts as a financial cover and protects your business from sudden and large financial burdens.

Bring Together All the Above 4 Stages Above:

After gathering all the required information regarding the incomes and expenses of the business, the next step is to create a forward-looking budget. A good budget balances a firm’s total income against its total expenses. For this purpose add all the fixed costs, variable costs, and one-time costs together. Then deduct the total from the total income. This will help to determine the overall profitability of the company.

Importance of a Business Budget

Creating a perfect business budget helps firms to understand how much income they have gained and how much did they spend. It also, helps the firms get an idea about the amount of money they will need in the future. An efficient budget can help businesses to make important decisions like cutting down unwanted expenses, hiring new staff members, purchasing new equipment, etc.

A business budget is a basis for the success of an organization. The following points will help you understand that a budget is an important element of the business.

• Controls finances of a business by estimating revenue, planning the expenditure, and restricting any unwanted spending
• Helps plan short-term and long-term goals for the growth of an organization
• It helps to know the financial health of the business
• It allows developing strategic plans for business expansions. Assists in preparing income, sales, and payroll taxes
• Attract people to invest in your company as a budget helps showcase where the money will be invested
• By having well-organized budgeted information, you can create accurate financial records

Different Types of Business Budgets

The final budget of a business is typically a blend of inputs from different other budgets developed at departmental levels. Below are the types of business budgets prepared by a company for its smooth functioning.

Master Budget

The master budget refers to a collection of lower-level budgets and is created by different organizational levels in a company. Management makes use of the budget to plan activities that are needed to achieve organizational goals. This budget uses data from cash forecasts, financial statements , and financial plans.

Operating Budget

An operating budget is an in-depth forecast of all expenses and revenues that a firm expects to get over a while. Firms usually formulate an operating budget at the end of the year to show expected activities during the subsequent year. It consists of fixed, variable, capital, and non-operating expenses. This information from this budget can be used to ensure whether the firm’s spending is according to the plans.

Cash Budget

A cash flow budget is an estimation of all cash receipts and payments that are anticipated to arise during a certain period. The estimates are made on a monthly, bimonthly, or quarterly basis. This budget is used to evaluate whether the company has required cash to continue its functioning throughout a given time frame. It helps determine the efficient allocation of cash.

Financial Budget

A financial budget refers to determining how much capital a firm will need to attain its long-term and short-term goals. The purpose of preparing a financial budget is to estimate the company’s cash, capital expenditures, and balance sheet items, including assets, liabilities, and owner’s equity. It gives an overall idea of the health and stability of your business.

Labor Budget

Businesses can find out how much it will cost to achieve the required goods production or service goals, both in financial and actual labor terms. Whenever a company is, planning to hire a new employee, they should consider creating a labor budget to determine how many laborers are required to achieve certain production levels.

Static Budget

Refers to a budget that incorporates the values of inputs and outputs that are conceived. It does not change throughout an accounting year. Usually prepared by nonprofit, educational, or government organizations who allocate a fixed sum to be used to undertake their activities. This budget is used to meet goals irrespective of any sales increase or decrease.

How Can Deskera Help You With Accounting of Your Expenses?

To make accounting of your business and expenses a hassle-free process, you should use Deskera Books . Deskera Books is online accounting software that will make your processes of financial reporting , budgeting and auditing easier, faster, and more efficient.

Deskera Books also comes with pre-configured tax codes, accounting rules, and charts of accounts. This will make sure you do not miss out on the benefits from tax-deductible expenses. Additionally, it will keep track of all your expenses and keep your financial statements and financial KPIs updated in real-time.

Lastly, you can even make your bookkeepers or accountants, or CPAs a part of your Deskera Books account by giving them access through an invitation link.

Key Takeaways

A business budget is a detailed plan which states where the company spends its money. These are detailed plans outlining how, when, and where you spend the business income and are prepared on a monthly, quarterly, or yearly basis.

Purpose of business budget:

An efficient budget acts as a road map for the business and helps gain control over its expenses. Below are some points that make it a necessity.

• Forecast earnings of the business
• Plan business expenditure
• Help businesses prepare for emergencies
• Attract investors towards the company
• Helps to allocate resources

Steps to create a business budget:

Business budget acts as a tool to help businesses minimize cost issues, improve focus, and help efficiently use cash. Before focusing on the preparation of the budget, identify which aspects of the business needs improvement. It helps decide how business funds should be utilized. The steps are as follows:

• Finding out the sources of income of the company
• Determine fixed costs of the business
• Finding out variable costs
• Calculate one-time spending of the firm, if any
• Bring together all the incomes and expenses identified in the above 4 stages

Importance of a business budget:

Creating a perfect business budget will help firms understand how much income they have gained and how much they spend. It is a basis for every company’s success. Below are some of the points why a firm must prepare a budget.

• Helps to plan and control the finances of the firm
• Control unwanted spending
• It Helps set group objectives towards which the business needs to work
• It helps in strategic planning
• Attracts investors to invest in the firm
• It creates accurate financial records
• Helps in strategic planning
• Creates accurate financial records

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Business Budget: What is it & Why is it important?

According to a survey conducted by Clutch , 61 percent of small businesses have not created a formal budget. Without a budget, you may not understand how your business is performing.

Creating a budget helps you understand how much money you have, how much you have spent, and how much money you will need in the future. A budget can drive important business decisions like cutting down on unwanted expenses, increasing staff, or purchasing new equipment. If you end up with insufficient money, the budget can guide you in altering your business plan or prioritizing your spending on activities.

With the right budgeting plan, you can keep your business out of debt or find ways to reduce the debt it is currently facing.  A comprehensive budget can even be used for obtaining business loans from banks or other financial institutions.

In this guide, you will learn about the importance of a business budget, the components of a good budget, and the different types of budgets.

So, what exactly is a business budget?

A business budget is a spending plan for your business based on your income and expenses. It identifies your available capital, estimates your spending, and helps you predict revenue.

A budget can help you plan your business activities and can act as a yardstick for setting up financial goals. It can help you tackle both short-term obstacles and long-term planning.

Different types of budgets

Your final budget is usually a combination of inputs from several other budgets that are prepared at a departmental level. Let’s look at the different types of budget and how they contribute to drafting a business plan.

1. Master budget

A master budget is an aggregation of lower-level budgets created by the different functional areas in an organization. It uses inputs from financial statements, the cash forecast, and the financial plan. Management teams use master budgets to plan the activities they need to achieve their business goals. In larger organizations, the senior management is responsible for creating several iterations of the master budget before it is finalized. Once it has been reviewed for the final time, funds can be allocated for specific business activities.

Smaller businesses often use spreadsheets to create their master budgets, but replacing the spreadsheets with efficient budgeting software typically reduces errors.

2. Operating budget

An operating budget shows a business’s projected revenue and the expenses associated with it for a period of time. It’s very similar to a profit and loss report. It includes fixed cost, variable cost, capital costs, and non-operating expenses. Although this budget is a high-level summary report, each line item is backed up with relevant details. This information is useful for checking whether the business is spending according to its plans.

In most organizations, the management prepares this budget at the beginning of each year. The document is updated throughout the year, either monthly or quarterly, and can be used as a forecast for consecutive years.

3. Cash budget

A cash flow budget gives you an estimate of the money that comes in or goes out of a business for a specific period in time. Organizations create cash budgets using inferences from sales forecasts and production, and by estimating the payables and receivables.

The information in this budget can help you evaluate whether you have enough liquid cash for operating, whether your money is being used productively, and whether there is and whether you are on track to earn a profit .

4. Financial budget

Businesses draft this budget to understand how much capital they’ll need and at what times for fulfilling short-term and long-term needs. It factors in assets, liabilities, and stakeholder’s equity—the important components of a balance sheet , which give you an overall idea of your business health.

5. Labor budget

For any business that is planning on hiring employees to achieve its goals, a labor budget will be important. It helps you determine the workforce you will require to achieve your goals so you can plan the payroll for all of those employees. In addition to planning regular staffing, it also helps you allocate expenses for seasonal workers.

6. Static budget

As the name suggests, this budget is an estimate of revenue and expenses that will remain fixed throughout the year. The line items in this budget can be used as goals to meet regardless of any increases or decreases in sales. Static budgets are usually prepared by nonprofits, educational institutions, or government bodies that have been allocated a fixed amount to use for their activities in each area.

Components of a budget

If you are starting a new business, the first budget you create might be a challenge, but it is a good learning experience and a good way to understand what works best for your business. The best place to start is getting to know your budget components. Initially you may need to make several assumptions to get your budget started.

1. Estimated revenue

This is the money you expect your business to make from the sale of goods and services.  There are two main components of estimated revenue: sales forecast and estimated cost of goods sold or services rendered. If your business is more than a year old, then your experience will guide you in estimating these components. If your business is new, you can check the revenue of similar local businesses and use those figures to conservatively create some estimated revenue numbers. But whether your business is new or old, it is important to stay realistic to avoid over-estimating.

2. Fixed cost

When your business pays the same amount regularly for a particular expense, that is classified as a fixed cost . Some examples of fixed costs include building rent, mortgage/utility payments, employee salaries, internet service, accounting services, and insurance premiums. Factoring these expenses into the budget is important so that you can set aside the exact amount of money required to cover these expenses. They can also be a good reference point to check for problems if your business finances aren’t going as planned.

3. Variable costs

This category includes the cost of goods or services that can fluctuate based on your business success. For example, let us assume you have a product in the market that is gaining popularity. The next thing you would like to do is manufacture more of that product. The costs of the raw materials required for production, the distribution channels used for supplying the product, and the production labor will all change when you increase production, so they will all be considered variable expenses.

4. One-time expenses

These are one-off, unexpected costs that your business might incur in any given year. Some examples of these costs include replacing broken furniture or purchasing a laptop.

Since it is difficult to predict these expenses, there is no certain way to estimate for them. But it’s wise to set aside some cash for this category to stay prepared.

5. Cash flow

This is the money that travels in and out of the business. You can get an idea of it from your previous financial records and use that information to forecast your earnings for the year you’re budgeting for. You’ll want to pay attention not only to how much money is coming in, but also when. If your business has a peak season and a dry season, knowing when your cash flow is highest will help you plan when to make large purchases or investments.

The final budget component is profit, which is a number you arrive at by subtracting your estimated cost from revenue. An increase in profit means your business is growing, which is a good sign. Once you have projected how much profit you are likely to make in a year, you’ll be able to decide how much to invest in each functional area of your organization. For example, will you use your profit to invest in advertising or marketing to drive more sales?

A budget is a road map for your business. It helps you predict cash flow, identify functional areas that need improvement, and run your operations smoothly. Successful businesses invest a lot of time and effort into creating realistic budgets, because they’re an efficient way of tracking the extent to which the business has achieved its goals. Creating a budget can get a bit overwhelming for new businesses as there are no previous figures to guide their budget estimates, but with some estimates based on the performance of competitors and an understanding of the components of a budget, you can complete your first budget and have a good road map for future budgets.

Related Posts

• Cash Flow Statement - Definition and Importance
• How to Create a Business Budget for Your Small Business
• Income statement - Definition, Importance and Example

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may I have more materials for budgeting?

Hey Patricia,

While we appreciate suggestions from our readers, we just wanted to let you know there’s more coming up on budgeting. However, besides this article, there’s another one on – How to create a business budget for your small business. Hope it’s insightful.

Has helped me learn a few things about types of budgets

I love this article. It is very helpful. I am interested in knowing which budgeting softwares are efficient when you say,” Smaller businesses often use spreadsheets to create their master budgets, but replacing the spreadsheets with efficient budgeting software typically reduces errors.” I am looking for one software for my company!

Thank you. Respectfully,

Hi Nilamba!

Budgeting is one of the important features in Zoho Books.

A few key highlights of Zoho Books include: 1. Management of vendors and customers. 2. Creating Estimates, Sales orders and Invoices. 3. Managing your Expenses, Bills, Purchase Orders. 4. Collaborative Client Portal through which your clients can easily view all their transactions and also make payments. 5. Integrations with other Zoho apps. 6. Integrations with Online payment gateways 7. Automated Bank feeds. 8. Exhaustive Reports and much more… It is available as a mobile app on Android, iOS and Windows as well. Please do write to us at [email protected] and we will be happy to explain how Zoho Books will be a great fit for your business.

Thanks you for the level of understanding on this topic but I need new materials as technology advance.

Thank you for the information, it’s great help.

Excellent and easily elaborated..

You might also like

Switch to smart accounting. try zoho books today.

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Business tips

7 free small business budget templates for future-proofing your finances

As a small business owner, you're likely balling with a lot more than your personal checking account. If you don't properly manage your business finances, there's more on the line than an overdraft fee—you now have an entire organization to account for.

Small business budgets are necessary to balance revenue, estimate how much you'll spend, and project financial forecasts, so you can stay out of the red and keep your business afloat.

But creating a small business budget template isn't a small task. Since I don't have a business to run, I did the heavy lifting for you—check out these free, downloadable templates for your small business budgeting.

Table of contents:

2. Overhead budget template

3. multiple-project budget template.

4. Startup budget template 

5. Labor budget template

6. cash flow budget template, 7. administrative budget template, periodic budget reviews, how to design your small business budget plan, small business budget faq, 1. static budget template.

Best for: Multiple departments or revenue streams; Industries with complex operations

A static budget combines all the function-specific budgets a business uses into one. Typically, a static budget includes the following items (plus any other budgets your business might use):

Cash flow projections: Estimations of how much money will flow into and out of your business. They also help you decide when, how, and what you should spend money on.

Total expected spending: All estimated expenses, including labor and administrative costs. 

By integrating all of your budgets and projections, the static budget provides a full picture of your business's estimated expenses and financial strategy for the upcoming fiscal year. 

Best for: Service-based businesses

It's easy to forget about expenses that aren't directly tied to production, like delivery charges or utilities. But these costs exist (and can add up quickly), so you need an overhead budget. A detailed overhead budget template will include:

Administration expenses

It compares your budgeted amount to actual figures (warning: it may be a rude awakening) and can help improve accuracy for future financial planning. 

Predicting overhead spending helps you plan how to use other funds more practically too—if you know how much you'll spend on overhead, you can make better business decisions. For example, you'd know whether you can afford to invest money into other initiatives like adding a delivery service or upgrading equipment.

Best for: Project-based industries

If you're managing multiple projects like website development or event planning, each with its own budget and expenses, you need a multiple-project budget to help keep your head on straight. This type of budget will help you track the following items per project:

Product-by-product COGS (cost of goods sold)

Labor costs

Equipment and resource costs

Indirect project expenses like travel

A multiple-projects budget establishes estimates for everything you need to get projects across the finish line. It also lets you track costs to ensure you're not spending more than you accounted for in the budget.

4. Startup budget template

Best for: New small businesses and startups

Startups need to ensure financial success from the get-go, so they can reinvest profit into the business and potentially attract more investors. 

But unlike established small businesses, you don't have past financial data to base expenses on. That's why you need a startup budget to focus on expenses for your first year of business, including items like:

Funding from investors and loans

Licensing and permits

Logo and website design

Website domain

Business software

Security installation 

Overhead expenses

Capital expenses

Best for: Larger businesses with lots of employees

Unless you're a one-person show, you'll need a labor budget. And even if you are a one-person show, it's good to know if you can afford to pay yourself. A labor budget breaks down all employee-related costs like: 

Payroll taxes

Contract labor

Break down employee costs into direct, indirect, fixed, and variable categories to clarify how your company allocates its resources. You can also consider different scenarios more easily when you understand the breakdown of labor costs.

For example, you can simulate the impact of adding or reducing staff in specific departments or assess the effects of different compensation structures on different teams.

An accurate forecast of labor costs ensures you can sustainably meet your staffing needs and can help you make informed hiring decisions. Down the road, it can also help you determine if you can afford to give your staff raises, bonuses, or additional benefits.

Best for: Businesses with fluctuating income and expenses; Seasonal businesses; Retail

As important as it is to be mindful of how much money you're spending, you should also track how much money you're making . A cash flow budget helps estimate how money is flowing in and out of your business. It includes:

Starting balance (set at the beginning of the month, quarter, or year)

Projected cash inflow from all revenue streams

Estimated cash expenditures

Ending balance (calculated at the end of the month, quarter, or year)

This type of budget lets you proactively manage your resources, anticipate potential cash shortages, and strategize for growth. For instance, if you know you're only going to break even this year, you may wait on expanding or making a large investment. 

Best for: Businesses focused on streamlining operations

An administrative budget includes all those general expenses that the company as a whole needs to function. This type of budget accounts for: 

Depreciation expenses

Training and development

Communication expenses

Accounting fees

While you could technically include administrative expenses in an overhead budget and call it a day, a separate administrative budget gives more of an eagle-eye view of how well your business is operating. 

Without an eye on administrative costs, you may be spending unnecessarily or lose focus on areas where it'd be wiser to invest your money. In other words, you could be spending way too much on fancy pens when you should be saving up to upgrade your cash register. 

A budget isn't a "set it and forget it" deal. Regular budget reviews can help you stay on track with your financial goals and respond proactively to changing market conditions. 

You should compare your estimated budget to actual spending. Then you can see where you went over and where you can splurge more. Try to review your budget monthly, quarterly, and yearly.

Monthly: Compare actual performance against your budgeted figures for the month. Identify any deviations and look for insights into cash flow, sales trends, and expense management.

Quarterly: Dive deeper into performance over the last three months. Use trends to project revenue and expenses for the upcoming quarter and identify areas for improvement.

Yearly: Reflect on your long-term financial objectives for the fiscal year. Assess the effectiveness of your budgeting strategies, and set new budget targets for the upcoming year. 

It's cliched but true: you gotta spend money to make money. But that's no excuse to start throwing cash at your business willy-nilly.

Budgeting forces you to prioritize your objectives, so you spend money on the things that matter most. Here's how to create a small business budget in four steps:

Identify your working capital for the budgeting period. Add up your current assets like cash, accounts receivable, and inventory. Then subtract current liabilities like accounts payable and short-term debt. The remaining amount is what you have left to cover your operational expenses during the budgeting period.

Separate business and personal expenses. If you haven't already, open a dedicated business bank account. This makes it easier to track, categorize, and analyze your finances.

Determine your fixed and variable costs. Make a list of costs that stay the same every month (fixed costs) and what changes (variable costs). These will change based on the purpose of the budget. For instance, a labor budget will only consider employee-related costs.

Calculate your total expenses. Add up all the costs for your business, including fixed costs, variable costs, labor, and any other applicable expenses. This total is how much your business needs to run. Any leftover money from your working capital can be allocated toward other business investments. 

Budgeting methods

If you've budgeted before and hated it, you may just have been using an ineffective budgeting method for your preferences. Here are a few budgeting methods to try instead: 

Traditional: This budget is set for a determined amount of time and uses last year's numbers as a benchmark. Once you set your budget, you don't change it unless you get approval for an adjustment.

Rolling: This dynamic approach spans a continuous time frame instead of a fixed time period. As each month or quarter passes, you add a new budget period and drop the oldest period. This lets businesses adjust projections based on real-time performance and market conditions.

Flexible: This budget changes along with your sales forecast. As real-time sales activity deviates from budgeted amounts, you recalculate the budget to reflect the new data. 

Still don't know where to start with your small business budget? Check out the answers to these common questions before you open a new Google Sheet.

What should a business budget include?

A business budget should include all income sources and expenses. Income sources could include projected revenue from sales, loans, or potential investor funding. Expenses may include items like office space rent, employee salaries, insurance, and marketing. Add anything that helps paint a full picture of your finances.

How much does the average small business startup cost?

The average small business startup costs $40,000 in its first year of business. But this will absolutely vary depending on your type of business, unique expenses, and cash income. For instance, there are multiple types of businesses you can start with $10,000 or less.

What is the best free business budgeting software?

The best free budgeting business software will depend on what your business needs, but you can try apps like Mint or Wave. Or you can use a spreadsheet—scroll up for some free small business budget templates.

Automate your small business

Knowing when or where to invest money into your business is just one of the many tasks you have on your plate as a small business owner. Learn how automation for small businesses can help take some of those recurring tasks off your hands, so you can focus on growing your business. 

Related reading:

The best free small business software

The best CRMs for small businesses

How to create effective document templates

21 free Google Sheets templates to boost productivity

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Cecilia Gillen

Cecilia is a content marketer with a degree in Media and Journalism from the University of South Dakota. After graduating, Cecilia moved to Omaha, Nebraska where she enjoys reading (almost as much as book buying), decor hunting at garage sales, and spending time with her two cats.

• Small business
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• Creating a Small Business Financial Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 02, 2023

Get Any Financial Question Answered

Table of contents, financial plan overview.

A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.

For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.

The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.

Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.

It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.

Understanding the Basics of Financial Planning for Small Businesses

Role of financial planning in business success.

Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.

With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.

For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.

Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.

Core Components of a Financial Plan for Small Businesses

Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.

Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .

For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.

As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.

Setting Clear Small Business Financial Objectives

Identifying business's short-term and long-term financial goals.

Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.

Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.

On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.

By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.

Understanding the Difference Between Profitability and Cash Flow

Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.

It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.

In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.

For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.

Estimating Small Business Startup Costs (for New Businesses)

Fixed vs variable costs.

When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.

Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .

For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.

One-Time Expenditures vs Ongoing Expenses

Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.

They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.

For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.

By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.

Funding Sources for Small Businesses

Personal savings.

This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.

While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.

The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.

Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .

The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.

However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.

Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.

Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.

However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.

Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.

The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.

Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.

Preparing Key Financial Statements for Small Businesses

Income statement (profit & loss).

An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.

By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.

For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.

The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.

Balance Sheet

The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.

Assets include everything the business owns, from physical items like equipment to intangible assets like patents .

Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.

Equity represents the owner's stake in the business, calculated as assets minus liabilities.

This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.

In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.

Cash Flow Statement

While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.

It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.

For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.

After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.

By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.

Small Business Budgeting and Expense Management

Importance of budgeting for a small business.

Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.

For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.

Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.

For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.

Strategies for Reducing Costs and Optimizing Expenses

Bulk purchasing.

When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.

However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.

Renegotiating Vendor Contracts

Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.

Building strong relationships with vendors often paves the way for such negotiations.

Adopting Energy-Saving Measures

Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.

Embracing Technology

Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.

Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.

Streamlining Operations

Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.

Outsourcing Non-core Tasks

Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.

For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.

Cultivating a Culture of Frugality

Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.

When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.

Forecasting Small Business Revenue and Cash Flow

Techniques for predicting future sales in a small business, past sales data analysis.

Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.

This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .

Market Research

Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.

For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.

Local Trend Analysis

For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.

These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.

Customer Feedback

Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.

For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.

Moving Averages

This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.

For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.

Regression Analysis

Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.

Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.

Understanding the Cash Cycle of Business

The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.

This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.

For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.

By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.

Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.

Preparing for Seasonality and Unexpected Changes

Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.

By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.

Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.

Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.

Securing Small Business Financing and Capital

Role of debt and equity financing.

When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.

Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.

Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.

Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.

The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.

Choosing Between Different Types of Loans

A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.

With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.

Lines of Credit

Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.

Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.

As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.

Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.

Peer-To-Peer Lending

A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.

This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.

However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.

Crowdfunding and Alternative Financing Options

In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.

These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.

Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.

Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.

Small Business Tax Planning and Management

Basic tax obligations for small businesses.

Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.

Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.

In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.

There might also be sales taxes, property taxes, or special state-specific levies to consider.

Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.

Advantages of Tax Planning and Potential Deductions

Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.

For small businesses, effective tax planning can lead to significant savings.

This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.

Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.

By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.

Importance of Hiring a Tax Professional or Accountant

While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.

An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.

They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.

Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.

The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.

Regularly Reviewing and Adjusting the Small Business Financial Plan

Setting checkpoints and milestones.

Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.

Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.

Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F

or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.

Using Financial Ratios to Monitor Business Health

Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.

The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.

Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.

In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.

Pivoting Strategies Based on Financial Performance

In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.

This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.

For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.

A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.

Bottom Line

Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.

With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.

As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.

Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.

Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.

Creating a Small Business Financial Plan FAQs

What is the importance of a financial plan for small businesses.

A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.

How do forecasting revenue and understanding cash cycles aid in financial planning?

Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.

What are the core components of a financial plan for small businesses?

Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.

Why is tax planning vital for small businesses?

Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.

How often should a small business review its financial plan?

Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to build a financial budget for your business (and why you need one)

• Jason Andrew
• March 15, 2022

There are few words in the English language that conjure feelings of scarcity and deprivation like “budgeting”.

Our amygdala responds to the word budget in the same way it responds to the word diet — with utter dread.

Budgeting, like dieting, is disliked because it requires determination. It requires us to be disciplined with our spending habits. It forces us to think twice about spending and adopt the mentality of penny-pinching. It often requires a change in habits. 

But let’s face it, the world revolves around budgeting. Everyone from the federal government to your 12-year-old niece saving for her first mobile phone are on a budget. In fact, three in four Australians regularly maintain a personal budget.

Unfortunately, this enthusiasm for money management doesn’t translate to the business world. My best estimate, based on my experience, is that less than five per cent of Australian SMEs maintain a business budget. This is a detriment to business outcomes, and perhaps the main reason why a lot of businesses fail. 

Here’s what’s involved in setting a financial budget for your business, and how it can help you to make decisions for the future. 

In this article: 

What is a budget? 

• The three-way financial budget 
• Why have a financial budget?

A budget is a financial plan for your business. It’s a tool that is used to quantify an organisation’s business strategy over a set time period. A budget is typically built for a 12 month period, and it’s designed by your accountant or CFO.

The process of building a business budget entails the following:

• Developing estimates of future sales and cashflow
• Developing estimates of future expenses
• Developing estimates of capital expenditure and financing arrangements
• Summarising these estimates into a projected profit-and-loss, a balance sheet and a cashflow statement. This process is referred to as a three-way budget .

It’s important to note that your budget is a living, breathing document. It is not a spreadsheet that is dumped in the archive folder, ready to be revived when your bank or VC requires it.

Rather, a budget should be reviewed every month, and actual performance should be compared against the current month’s budget. This analysis allows your management team to measure progress against the organisation’s goals. This assessment guides management’s actions for the future.

A three-way financial budget 

At the risk of inflicting death by spreadsheets, a three-way budget is a jam-packed document filled with forecasted financials about your business. 

The outputs – your budgeted profit-and-loss, balance sheet and cash flow statement – are built off a set of assumptions tailored to your business. We include known expenses such as your employees, your capital expenditure, and all of your fixed operating costs. 

From a revenue perspective, we do deep analysis into the products you sell, the average gross profit margins, and even forecasting your inventory. 

We use all of the assumptions of your business to build your financial plan that becomes the blueprint for your business for at least the next 12 months. This allows management to predict the future, set targets and work towards a goal. Importantly, it helps you to look forward and plan for the future of your business.

Why have a financial budget for your business? 

There are a range of benefits that come with maintaining a financial budget.

1) Quantify what is and isn’t working

The process of comparing actual results against a budget allows your management team to assess how the organisation is tracking compared to its goals. It can act as a data point to address what tactics are working, what isn’t working and what should be tweaked.

2) Predict the future

A well prepared and thought-out budget can help to predict future financial performance. By assessing projected sales, expenses and cashflow, it allows management to make proactive decisions. For example, if budgeted sales are expected to be lean due to the holiday season, financing facilities can be pre-approved to fund any working capital shortfalls.

3) Align management to organisational goals

Keeping staff and management aligned to the goals of the organisation is hard to do without a pace car. A budget can provide the set of quantifiable targets they can strive towards. Simply put, it’s an accountability tool.

4) Understanding the business drivers

Beyond visibility, the value of developing a budget is in the process. It will help your management team understand what drives your business. For example, revenue should be broken down to number of leads, average sale value and conversion rate.

To create discipline within our business, we must focus on the process, rather than the end goal. Focus on the ritual of being accountable to the budget framework and make tweaks as we go — rather than leaving it to a mad sprint to the finish line.

A budget is an antidote to our impulsive, often emotionally charged decisions. It’s a tool to keep us disciplined and focused on our long-term strategic goals. 

Just like your 12-year-old niece has her heart set on buying a phone, you can achieve your business goals with a thorough financial budget. 

So, if you’re interested in setting financial accountability in your business, send me a DM . We’re here to help.

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How to Create A Financial Budget for a Small Business

The Cash Budget, Capital Budget, and Budgeted Balance Sheet

• Purpose of Financial Budget

Capital Expenditures Budget

Cash budget, budgeted balance sheet.

The financial budget is one part of a business's master budget. The second part of the firm’s master budget is the operating budget. The master budget is the financial portion of the business's strategic plan for the near future. The strategic plan for the business maps out the firm's planned financial activities for the next five years.

Purpose of the Financial Budget

The purpose of the financial budget is to estimate the firm’s cash budget , capital expenditures , and balance sheet line items like assets, liabilities, and owner’s investment. The financial budget is the last budget to be developed by the firm every year since all other budgets, like the individual budgets in the operating budget, are necessary first.   The financial budget helps the firm by allowing it to calculate net profit when the budget process is complete.

The capital expenditures budget is the first budget of these three budgets to be prepared within the framework of the financial budget.   The information from this budget is needed for both the cash budget and the budgeted balance sheet.

Capital expenditures  are fixed asset expenditures. Fixed assets are equipment or facilities needed for a business to operate. These expenditures also include maintenance for these items. While there are businesses that purchase larger amounts of fixed assets, most smaller businesses do not.

Small businesses tend to be more conservative in their capital expenditures since these types of purchases can be very costly. Many do not own the facilities they operate in, reducing capital expenditures.

While an expenditures plan for maintenance of the equipment is likely, a smaller business may lease, rather than own, their equipment. Consider depreciation and standard lifetimes of your equipment when designing your capital budget if you own your plant and equipment.

Here is an example of a simple capital expenditures budget for a small business:

The cash budget is a short-term, internal-only financial document usually prepared on a monthly basis. It is a tool that helps the business manage its net working capital .

Business firms, especially small ones, cannot operate without cash. Cash is king in the small business firm. The cash budget is a very important tool that a business firm should rely on. 

The cash budget shows the firm how much cash is either available to the firm at the end of each month or how much the firm will have to borrow.   The cash budget accomplishes this by comparing the cash receipts the firm takes in each month against the cash purchases it makes.

Firms will usually develop a forecasted monthly cash budget for a one-year time period.   If the cash budget shows an increase in net working capital, the firm may use that increase to reduce operating costs; by repaying borrowed money, for example. If the cash budget shows a decrease in net working capital, you may need to find some way of increasing available cash; by drawing on a line of credit, taking out a bank loan or by  factoring . 

Here is an example of a simple cash budget:

In this example, the ending available cash ($20,000) exceeds the ending cash used ($18,000) by $2,000, which represents the net cash available and the beginning cash position for the following month.

Both the capital expenditures budget and the cash budget must be completed before the budgeted balance sheet can be developed. The budgeted balance sheet begins with the current balance sheet. It then takes the data from the other budgets that have been developed, such as the cash budget and the capital expenditures budget. It also takes the data from the firm’s operating budget .

That data includes the firm’s sales forecast—the production budget which includes the direct materials purchased budget, the direct labor budget, and the overhead budget; the ending finished goods inventory budget; the cost of goods sold budget; and the selling and administrative budget. After you combine this information and the information from the financial budget, you can develop the budgeted balance sheet.  

Quickbooks Canada. " Formulating and Forecasting a Yearly Budget ." Accessed Jan. 14, 2020.

Lumen Managerial Accounting. " 11.5 Controlling Capital Investment Expenditures ." Accessed Jan. 15, 2020.

Lumen Learning. " Cash Budgeting ." Accessed Jan. 16, 2020.

PrinciplesofAccounting.com. " Components of the Budget ." Accessed Jan. 16, 2020.

PrinciplesofAccounting.com. " Components of the Budget ." Accessed Jan. 17, 2020.

Financial Budgeting

Financial budgeting definition.

Financial budgeting is the process of planning company expenses and revenues for a time period. Budgets set forth the plans of management in financial terms. This includes allocating financial resources and identifying available cash flows for required spending.

A budget and financial planning strategy detail a company’s expectations for what it aims to achieve for the current, upcoming year or another timeframe. For example:

• Expense and revenue estimates
• Cash flows expected
• Debt reduction expected
• Comparison of actual versus projected business financial budget, calculation of variances between them

Financial budgeting represents the overall financial position, goals, and cash flow of an organization. This regular practice of timely operational and financial budgeting creates a baseline for comparison to see how actual results vary from expected performance.

Basic corporate financial budgeting process steps for an annual budget usually take between three to six months to complete. The components of this process, which remains confidential, might include:

• Establish and communicate management targets and goals
• Develop the detailed, final budget to directly support those targets and goals, and attach financial documents such as the balance sheet, income statement, and cash flow statement
• Finalize employee compensation plans (usually this is part of the process)
• Compile and adjust budget model and measurement metrics so management can assess progress
• Review and make final changes
• Disseminate subordinate and/or line of business budgets across the organization

Financial budgeting enables a team to implement a business plan tactically to achieve corporate goals based on a detailed and descriptive roadmap using set metrics. This allows for careful monitoring of performance over time and the ability to make changes while in progress to eventually achieve the desired goals.

Financial Budgeting FAQs

What is financial budgeting and forecasting.

Financial budgeting and financial forecasting help organizations plan where and how to evolve. The financial budget helps the business with the plan itself and the financial forecasting helps the team assess the current financial situation and whether the organization is moving in the right direction financially. The two tools are used in tandem, but they are distinct.

Budgeting quantifies the projected finances a business will be working with during a period. It sets the company’s financial direction for that period and sets expectations for income and revenue.

In contrast, financial forecasting estimates how much income or revenue will be achieved in a future period. This projection helps determine whether the company is meeting goals, allocating funds properly, and going in the right direction.

Budgeting serves as a baseline for comparison; this way management can see how expectations differ from actual performance. Management uses financial forecasting to analyze historical trends and company data to determine how to allocate the budget for the future.

In brief, financial forecasting:

• Does not engage in the historical analysis of the difference between actual performance and past forecasts like budgeting
• This is the future-facing assessment of how to allocate the budget for a future period
• Updated regularly, periodically, month-to-month or quarterly, as inventory, operations, or the financial budgeting plan change
• Can be short-term and/or long-term and can be updated with new data; for example, quarterly revenue forecasts might need to be updated based on changes to customer roll-up
• With forecasted data, a management team can take immediate action

Why is Budgeting Important for Financial Planning?

There are several reasons why financial management is important:

Greater resource availability. The primary function of financial budgeting is to ensure core resources are available as needed to implement plans and achieve business goals. Advance planning of financials allows leadership to determine which initiatives and teams require more or fewer resources.

Inform financial goals. Financial planning and budgeting can help set metrics for internal financial goals and record progress against them. Budgeting for any given period involves assessing how much revenue is needed to meet company-wide and team financial goals, not just allocating spend. Financial goals should be evidence-based and achievable enough that they inform other budget allocations.

Prioritize projects and initiatives. The value proposition of financial budgeting techniques is that prioritizing projects and initiatives is a natural byproduct of the process. When prioritizing each project, consider how it aligns with company values, the potential return on investment (ROI), and the extent it might affect broader financial goals. Determine each line item’s value to the organization and compare them.

Optimize financing opportunities. Documented budgetary information is particularly important for anyone potentially seeking funding or financing, such as a startup seeking outside investors, or an existing company needing a loan. Investors value detailed information about past, current, and predicted financial performance highly. Offering budgeting and financial reporting documents for previous periods demonstrates the ability to manage the finances of a business and allocate funds, and in some cases is required.

Achieve optimal flexibility. Ideally, everything goes to plan and all predictions are accurate. But as things like the coronavirus (COVID-19) pandemic in 2020 show us, this is rarely the case for organizations in the real world. Executives must often rework budgets thoughtfully and rapidly to account for safety concerns, major losses, and potential reputation damage. A budget is a plan to start with, and an agile mindset and the right tools enable leadership to adjust the plan as needed.

Business financial management is important because it helps organizations improve their profitability, extend their mission, save money, remain economically stable, and increase in value over the long haul.

Types of Financial Budgets

There are several types of financial budgets. Each approaches financial planning prioritizing different factors. Here are some common types:

Zero-based budgeting. At the start of each planning period, each item is set at zero dollars before reallocating. This approach is often used by organizations in financial distress, allowing them to start over each period.

Activity-based budgeting. Works backward from the company’s goals to determine the cost of achieving them and can be used to improve efficiencies and cut costs, especially in a large business.

Static budgeting/Incremental-based budgeting. Creates the budget for the upcoming period by adding or subtracting a percentage from the previous period using historical data. This model is usually best for businesses with highly predictable revenue and expenses that don’t fluctuate much.

Performance-based budgeting. Performance-based budgeting focuses on cash flow per unit toward programmatic results. It is often used by governments and nonprofits that need to keep an overall focus on their mission.

Value proposition budgeting. Assumes only line items that directly provide value to the organization should be included in the budget. This is another approach to government spending and sometimes to larger businesses taking an aggressive approach to spending.

Trialing various financial budgeting and forecasting techniques is one way to determine which is best suited to your organization; the right type of financial budget varies by situation and company.

What is the Financial Budgeting Process?

There are multiple steps in the process of creating a budget. Keep budgets as detailed and thorough as possible. Typically, a financial budget should include:

• All predicted revenue—including the value, types of revenue, and when it is expected
• Fixed expenses for the organization (employee salaries, insurance, property taxes, rent, utilities, etc.)
• Variable costs (maintenance, professional services, supplies, vehicle and travel expenses, etc.)

To create a budget, consider these financial budgeting tips:

• Review, collect, and comprehend all of the required budgetary inputs
• Analyze historical data, including previous budgets, to determine revenue and expense expectations by each fiscal period and year
• Collaborate with a cross-functional team of stakeholders, including budget owners, C-suite executives, and sales leaders to formulate the plan
• Identify any required capital expenditures such as infrastructure, equipment, or property that are required during the period
• Prepare financial statements with budgeted numbers including balance sheet, cash flow, and income statement
• Identify KPIs to measure progress
• Review the final budget for strategic growth opportunities such as adding equity or reducing debt, or other investment and divestment opportunities

Always monitor progress throughout the budgeted period, based on performance against budgeted goals, and update forecasts periodically.

Generate reliable financial forecasts as follows:

• Identify key metrics to focus the forecast such as marketing expenses or sales volume
• Input the latest actuals into the forecast template
• Determine the forecast time frame, typically to the end of the budgeted period
• Calculate trends based on year-to-date and historical actuals
• Apply trend calculations to real-time numbers and forecast results
• When updating the forecast, consider any variables such as geopolitical conditions or business situations, like a merger, that could skew the forecast

Periodic forecasts typically only project to the end of the current fiscal year. Instead of projecting to the end of the fiscal year, rolling forecasts are generated monthly, quarterly or weekly to help plan for a specific period beyond the annual budget—the coming six quarters, for instance. The forecast actualizes a unit, whether it’s a fiscal month or quarter, and then “rolls” to the next period. This enables the leadership to keep sight of long-term business strategies.

What is Included in a Financial Budget?

A financial budget offers a strategic overview of how a business manages cash flow, assets, expenses, and income. It establishes a comprehensive overview of revenue from core operations relative to spending via a comprehensive documentary picture of a company’s financial health. Financial budgets typically include a balance sheet, budgeted income statement, capital expenditures budget, and cash budget.

Benefits of Financial Budgeting

Financial budgeting enables an organization to chart its path and empowers the management team to engage in strategic enterprise budgeting and planning . The financial budgeting process delivers a clearly defined plan that reflects organizational goals for operations and finances. Financial budgets offer critical guidance for the year’s goals.

Other key benefits of financial budgeting include:

• Close examination of financial activities
• Expenses are more likely to be assessed for viability
• Detailed documentation of all the uses and sources of cash is required, ultimately allowing for accurate anticipation of cash flows by management
• Cross-functional stakeholders involved in budgeting create a sense of ownership and motivate team to achieve budgeted goals
• Budget, forecasts, and up-to-date financial results can always be compared for real-time insights into performance, and offer a chance to adapt
• Clarifies internal hierarchies and individual responsibilities
• Clarifies where and when financial resources are allocated and needed

Remember, budgets can become outdated as they are prepared in advance and based on a number of assumptions, so forecasting is also important—especially when questions are time-sensitive.

Other benefits to forecasting include:

• Forecasting identifies trends that may require a strategic adjustment
• A well-informed prediction of how, when, and why future costs may fluctuate enables simpler management of capital requirements and cash flows
• Reliable forecasts may open up more opportunities for financing with investors
• Forecasted numbers offer a logical starting point for the next budget
• Forecasting offers smart short-term focus for managers

Who is Responsible for Enterprise Financial Budgeting?

The budget owner is the person who is ultimately responsible for ensuring that the budget is followed. Budget owners are usually the operational directors and managers of companies who must ensure that the company follows whatever budget is laid out for them. The shareholders, owners, or the board of directors tasks the budget owner with this one, overarching duty.

Many large companies employ a committee of multiple budget owners charged with ensuring that the budget is followed. Typically, the committee consists of directors and managers from various divisions and departments of the company. This is a more democratic but less efficient approach that can lead to indecisiveness and even infighting.

However, even a single budget owner does not work alone and instead has consultants, financial experts, lawyers, industry experts, and others working under them. The budget owner is ultimately accountable to the shareholders or owners.

Typically on the budget owner team:

Department managers. Mid-level department managers provide information to the finance and accounting department throughout the budgeting process, reporting revenue contributions and departmental expenses and providing the details needed to project future income and expenses.

Finance and Accounting team. Corporate finance and accounting teams manage accounts receivable, accounts payable, bookkeeping, and payroll. Senior associates might create sales and payroll reports, analyze input-cost trends, audit expense reports, or engage in other tasks as part of the budgeting process.

Corporate executives. Corporate executives at the top management level are directly accountable to the board of directors, manage the company’s finances, and present final budget proposals to the board. The chief financial officer (CFO) or equivalent executive is responsible for top-level budgets based on the finance or accounting team’s input. Sales directors forecast the next year’s sales trends. Chief operating officers (COOs) forecast future payroll and operating costs. Chief marketing officers (CMOs) forecast the next year’s expected market-share increase and marketing expenses, while chief technology officers (CTOs) forecast technology expenses.

Board of Directors. Corporate executives report directly to the board of directors who serve as the stockholders’ chosen representatives, and offer the final vote on proposed budgets. Board members answer directly to shareholders and company owners.

What are Financial Budgeting Tools?

There are a number of challenges that impede financial budgeting and forecasting efforts. Financial planning & budgeting software tools are commonly used to deal with these issues—because nearly all of them have to do with coping with data.

Disparate, wide-ranging sources of disconnected data collected. Data silos are a tremendous problem for finance and budgeting teams. Trying to extract data from siloed sources reduces the time spent on real analysis. It slows down the financial budgeting and forecasting cycle and makes it tougher to adapt to rapidly changing market conditions.

Manual processes and inaccurate data. While many finance teams still use offline spreadsheets and similar analog tools for financial budgeting and other core FP&A activities, they are slow, labor intensive, and impossible to manage across large businesses. Something like an Excel spreadsheet lacks the version control and data integrity solutions of corporate financial budgeting software with database capabilities.

Time-consuming data collection and input automated. Many contributors spending time editing many spreadsheets means that aggregation and data entry will be lengthy, error-ridden tasks. Finance automation tools render this manual sorting of budgeting data unnecessary.

Difficult collaboration simplified. The old-fashioned way of collecting data for the budgeting process from various departments is difficult. Spreadsheets are inflexible, and it’s not easy to aggregate, manipulate, retroactively change, and/or share budgeting data. An FP&A platform such as Planful makes data sharing and work between cross-functional teams simpler, and lends visibility to processes with current, accurate data. 

Insights made relevant. Real-time tracking of forecasting and financial budgeting KPIs are the key to regulating the financial health of a business. This kind of agile budgeting and financial planning process keeps companies profitable and competitive.

The role of data-driven platforms is to remain responsive, and rapidly help the user share insights. They can generate accurate sales forecasts based on historical data, create projections for future sales, and predict fluctuations to help develop accurate budget plans.

Does Planful Help With Financial Budgeting?

How does Planful financial budgeting and forecasting software help with financial budgeting?

Planful financial budgeting and forecasting software helps by providing teams with audit trails, workflows, and data validation measures all in one place for confident financial budgeting and forecasting.

There are many reasons to automate data entries for financial budgeting and forecasting:

• Reduce budgeting and forecasting cycle times by up to 50% or more
• View forecasts, budgets, and actuals from the same template so you can more easily identify trends and variances
• Drill down into transaction-level details right from your budget and forecast templates
• Complete planning solutions don’t usually require maintenance or management from IT
• Cross-functional stakeholders can all work from the same connected template. Audit trails allow users to track, validate, and approve changes and add commentary
• Scenario modeling features make it simple to test forecasts and budgets against an unlimited number of potential future business scenarios 
• Customizable workflows let you supplement the budgeting process with an additional executive review step
• Data visualization dashboarding helps stakeholders visualize where the business is headed

Curious to learn what else Planful can do to help your team learn how to do financial budgeting more effectively? Contact us for a demo of our automated financial budgeting services.

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Why Is Budgeting Important in Business? 5 Reasons

• 06 Jul 2022

There are few skills as critical to running a business as budgeting. Yet, over half of the executives surveyed in a 2019 McKinsey study report feeling dissatisfied with the transparency surrounding their organizations’ budgets.

Any employee—especially managers—should understand budgeting and how it can profoundly impact an organization.

Here’s a primer on the importance of budgeting in business.

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What Is Business Budgeting?

Budgeting is the process of preparing and overseeing a financial document that estimates income and expenses for a period. For business owners, executives, and managers, budgeting is a key skill for ensuring organizations and teams have the resources to execute initiatives and reach goals.

A basic budget consists of projected income and expenses for a given period (for instance, the upcoming quarter or year). After expenses are subtracted from projected income, the leftover money can be allocated to projects and initiatives, ensuring you’re not planning to overspend.

Budgets from previous periods can be compared to the company’s actual financial allocation and performance, giving an idea of how close predictions were to actual spend.

For example, imagine you allocated $10 million for your company’s annual corporate social responsibility (CSR) project. Unforeseen circumstances caused it to run $1 million over budget, and that money had to come out of other projects’ budgets.

During the project’s postmortem, you ask questions like, “Why did we run over budget? Was this an issue of inefficiency or misallocation?” When creating the budget for next year, you use those insights to tighten the process and keep the project’s spend at $10 million or more accurately allocate funds to other projects.

Types of Budgeting

There are several budgeting types that each prioritize different factors when approaching a financial plan. These include:

• Zero-based budgeting , which sets each item at zero dollars at the start of periods before reallocating
• Static budgeting or incremental-based budgeting , which uses historical data to add or subtract a percentage from the previous period to create the upcoming period’s budget
• Performance-based budgeting , which emphasizes the cash flow per unit of product or service
• Activity-based budgeting , which starts with the company’s goals and works backward to determine the cost of attaining them
• Value proposition budgeting , which assumes no line item should be included in the budget unless it directly provides value to the organization

The right budgeting type varies by company and situation. If your organization is in financial distress, the zero-based method may be the best fit, as it starts from scratch each period. Trying out several methods is a good way to determine which is ideal; when doing so, ensure your entire organization is aligned.

Related: 6 Budgeting Tips for Managers

Why Is Budgeting Important?

Budgeting involves number-crunching, attention to detail, and making informed decisions about fund allocation—but it’s well worth the effort. Here are five reasons budgeting is important in business.

1. It Ensures Resource Availability

At its core, budgeting’s primary function is to ensure an organization has enough resources to meet its goals. By planning financials in advance, you can determine which teams and initiatives require more resources and areas where you can cut back.

If, for instance, your team needs to hire an additional employee to scale efforts, budgeting for that in advance can allow you to plan other spending.

2. It Can Help Set and Report on Internal Goals

Budgeting for an upcoming period isn’t just about allocating spend; it’s also about determining how much revenue is needed to reach company goals.

You can use budgeting to set company-wide and team financial goals that align with them. This is especially prominent when using activity-based budgeting, but it’s beneficial no matter which type you use.

Financial goals should be attainable enough that you count on them to inform the rest of your budget allocations. Your goals inform the expenses needed to reach them and vice versa.

You can also use budgeting to update employees on progress and revisit the next period’s goals. For instance, if your company aimed to gain 10,000 new users this past year but fell short by 4,000, what could you have done differently? Does the initiative require fund redistribution? What resources could have propelled progress?

Tracking progress, or lack thereof, allows you to align your team and plan for growth in the next period.

3. It Helps Prioritize Projects

A byproduct of the budgeting process is that it requires prioritizing projects and initiatives. When prioritizing, consider the potential return on investment for each project, how each aligns with your company’s values, and the extent they could impact broader financial goals.

The value proposition budgeting method forces you to determine and explain each line item's value to your organization, which can be useful for prioritizing tasks and larger initiatives.

4. It Can Lead to Financing Opportunities

If you work at a startup or are considering seeking outside investors , it’s important to have documented budgetary information. When deciding whether to fund a company, investors highly value its current, past, and predicted financial performance.

Providing documents for previous periods with budgeted and actual spend can show your ability to handle a company’s finances, allocate funds, and pivot when appropriate. Some investors may ask for your current budget to see your predicted performance and priorities based on it.

5. It Provides a Pivotable Plan

A budget is a financial roadmap for the upcoming period; if all goes according to plan, it shows how much should be earned and spent on specific items.

Yet, the business world is anything but predictable. Circumstances outside your control can impact your revenue or cause priorities to change at a moment’s notice.

Consider the onset of the coronavirus (COVID-19) pandemic in 2020. The economic impact of travel bans, lockdowns, and other safety precautions was far-reaching and unexpected. Executives were forced to quickly—yet thoughtfully—rework budgets to account for major losses and newfound safety concerns.

More than two years later, executives are rethinking their budgeting procedures to make it easier to pivot if needed. One shift noted by McKinsey is the turn toward zero-based budgeting to determine the minimum resources necessary to survive as a business—should the circumstances call for it.

A budget gives you a plan; maintaining an agile mindset enables you to pivot that plan and help lead your organization through turbulent times.

Learn to Budget Effectively

Anyone can learn to budget effectively and reap the benefits. To build a foundation of financial literacy , gain a deeper understanding of the levers that impact an organization’s finances, and discover how budgeting can enable you to become a better leader and manager, consider taking an online financial accounting course .

Do you want to take your career to the next level? Explore Financial Accounting —one of three online courses comprising our Credential of Readiness (CORe) program —which teaches the key financial topics needed to understand business performance and potential. Not sure which course is right for you? Download our free flowchart .

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Mastering Your Finances: A Complete Guide to Financial Budgeting for Businesses

• By Iqbal Ahmed
• June 16, 2023

Table of Contents

Also, Optimizing an organization’s financial health can be a challenging task, especially for CFOs and other finance leaders. Maintaining control over an enterprise’s spending and resources is crucial for success. Financial budgeting serves as a critical aspect of business planning, allowing organizations to effectively allocate their financial resources and gain valuable insights into their operations. A meticulously designed budget is essential for tracking revenue and expenditures, pinpointing areas for cost savings, and making data-driven decisions about your company’s future.

In this blog, we will delve into the world of financial budgeting, planning, and forecasting and provide practical tips and strategies to take control of your business’s financial health. Whether you are just starting out or looking to optimize your existing financial practices, this guide will empower you to make sound financial decisions and pave the way for sustainable growth.

What is Financial Budgeting?

Financial budgeting is the process of planning, estimating, and allocating financial resources for a specific period to achieve an organization’s goals while ensuring effective control over expenses and revenue.

Understanding Financial Budgeting – A Roadmap to Achieving Financial Goals

Financial budgeting is the process of creating the roadmap for managing money, typically over a fiscal year.

At its core, a financial budget helps determine your cash flow and make adjustments based on the business plans and market environment. Then, with the help of a detailed balance sheet, income statement, and cash flow statement, you can update stakeholders about the current business standing.

Finance Transformation for Agile Budgeting & Planning

Discover how to achieve financial goals through and enhance planning processes

The importance of financial budgeting

The financial budgeting process essentially helps you understand the company’s financial health by evaluating the money at hand. After allocating financial resources, you can plan your business’s next move, tap into opportunities to scale further, or prepare for unforeseen circumstances.

To put this into perspective, let’s say you have a small sales team and want to add another resource. Having a financial budget will help you answer the following questions:

• Does my company have enough money to afford an additional resource?
• How long can your business afford the resource?
• What would be the ROI of this resource?

This is where financial budgeting can help. By calculating how much money your business has, is expected to make, and your expenses, you will be better positioned to plan activities for the next quarter or year and keep your company’s financial health in check.

Steps to an effective financial budget

Budgeting your finances effectively is critical, and here are a few steps on how you can do it:

Understanding the goals

The budget that you form depends largely on the goal that you set for a certain time. For example, if you want to launch a product by the end of the year, you must set up your budget so that you have enough funds to launch this product. You can then set aside funds, control your expenses, and create an action plan to increase your income in addition to your startup.

Estimation of income and revenue

Building a budget requires a clear assessment of cash inflows for a specific period. Let’s say you have a certain number of active customers for your services. It is easier to estimate the income from such clients. However, if you have a SaaS product, you must analyze historical sales data and evaluate market trends to understand your revenue over a certain period.

It is also important to look at other sources of income such as stocks, bonds or investments. This will give you a more accurate picture of your income.

Knowledge of expenses

Income and expenses go hand in hand. So, once you’ve calculated your income, it’s time to look at your expenses. These include:

• Fixed costs: These remain constant throughout the fiscal year, such as software subscriptions, debt payments, utilities, etc.
• Variable costs: costs that change over time. For example, there are certain seasons when there is demand for products In this case, all of these costs will change over time to compensate for the increase in production.
• One-time expenses: These are expenses made only once, such as buying a piece of land for a manufacturing plant, buying and setting up equipment, etc.

Fixed and variable costs are recurring, so you must pay close attention to them in financial planning, budgeting and forecasting.

      4. Defining the budget

Budgeting means coordinating your income and expenses to determine how much you have for your expenses. If you have a budget surplus (extra funds), you should develop a plan to help you use the extra funds, especially for emergencies.

Conversely, if your budget exceeds your expenses (deficit), you must plan how to fill the gaps. For example, cut unnecessary expenses, increase sales, or sell any bonds or stocks to raise additional capital.

Common mistakes in financial budgeting.

Misunderstanding your variables.

While understanding your revenue and expenses is critical, it is not the only element that determines cash flow. A SMART budget depends on many variables – market size, geography, and, most importantly, time.

With consistent forecasting, you can estimate performance and set your budget based on an understanding of what cash flow you have to survive.

      2. Not to revise the budget

The market is constantly changing, as are many other external factors. Thus, monitoring your budget is essential mainly to see if you are going toward your goals. Often businesses don’t make immediate decisions, leading to disastrous long-term failures.

If you can make changes based on assumptions, you can set a better precedent for future budgets.

     3. Single-scenario budgeting

Again, data plays a critical role in financial planning and budgeting. When planning your budget, you need to be prepared for situations that haven’t happened yet. With fewer ideas, you will be unprepared for problems that may arise in the future.

Financial planning and analysis tools can help you create scenarios and track their impact on your finances. This helps you set a more realistic budget.

     4. Unrealistic goals

You shouldn’t base your goals on “how much revenue I want to make. Instead, you should focus on the question, “How much revenue can I get over a certain period?”

Setting hard-to-achieve goals will not be good for your budget, but it will have the opposite effect. You can research the competition, the data, and the market to better understand what your goal should be.

Using financial forecasting capabilities

What is financial forecasting.

It uses historical financial data, current trends and anticipated market conditions to forecast future financial performance. Forecasting estimates future revenues, expenses and cash flows, providing businesses with critical information to optimize their budgets for efficient use of resources.

Difference between financial budgeting and forecasting

A financial budget and a financial forecast are both financial planning tools that help businesses track their financial performance.

In essence, budgets are more detailed and are used to set spending limits and track performance. Forecasts are less detailed and are used to predict future financial performance, identify trends, and allocate resources. Building a forecast also helps create a strategy to optimize and better utilize your budget.

Here, we have summarized the key differences between a financial budget and forecast:

For successful financial planning and budgeting , it’s crucial for both budgeting and forecasting to work together, allowing you to set a plan of where your financial resources will be utilized and predict what your financial health will be in the near future.

Types of financial forecasting

There are four types of financial forecasting methods:

Bottom-up Forecasting

This forecasting method looks at details from the lowest level to the highest. It predicts or estimates future outcomes by starting with individual components or elements and aggregating them to form a larger forecast. In this approach, forecasts are generated at a granular level, such as individual products, regions, or departments, and then combined to create an overall forecast for the entire organization or system.

Let’s say you’re the manager of a retail store chain with multiple locations. You want to forecast the sales for the upcoming quarter to make informed decisions about inventory, staffing, and marketing. Using the bottom-up approach, you would gather sales data from each individual store and use that data to forecast the sales for each store. Then, you would aggregate the forecasts from all the stores to arrive at the total sales forecast for the entire retail chain.

In essence, this method is great for businesses with significant historical business data as it allows you to break down your forecast to generate a unified final result. That means you’ll be able to systematically make predictions for each company unit and make the necessary changes.

Top-down Forecasting

It assesses the market through competitive analysis, market research, and industry trends. Using this forecasting method, you get a holistic view of the business landscape and what your business needs to grow in the industry. Top-down forecasting is more suitable for startups with little to no historical financial data to perform forecasting.

Correlation Forecasting

This type of forecasting helps you identify the correlating variables by tracking the ones affected by market fluctuations. Correlation forecasting will help you analyze the relationship between different variables and how they affect each other.

Let’s take supply and demand as an example. When the demand for a product increases, the supply often decreases. Correlation forecasting will help you evaluate the forecasted increase in demand, thereby setting a budget for increased investment in products.

Statistical Forecasting

These models are quantitative and use historical data to predict future scenarios.

Statistical forecasting helps identify repetitive patterns and compares independent variables with dependent ones to understand the effects. This method includes moving average, straight-line, multiple linear, and simple linear regression.

Delphi Forecasting

Delphi forecasting is an interactive method where the group of experts are provided with a questionnaire asking them to comment on different categories – such as improvements, experience in the department, personal opinions, etc.

These results are anonymous and sent to the facilitator, who aggregates the responses and shares the questionnaire again based on the updated reports. The final results are then evaluated for enhancements that your company can make.

The process is anonymous, which consequently ensures the consensus lacks biasness, and allows experts to reflect their answers based on several rounds of questioning. Different perspectives will allow your company to understand what changes can benefit all the departments and improve productivity.

Asset and Liability Management Forecasting

The Asset and Liability Management (ALM) model will allow your management to understand the potential risk posed by changing interest rates. The management uses this to create the quarterly earning report based on your budget.

Also, ALM provides insights into your company’s future by showing the projected results and how you can manage your assets in the future.

How to create a financial forecast

To create a financial forecast, you need to have a strategy that defines your goals. Here are the steps to build a successful forecast:

Define the time period

Determine the duration for which you want to create the forecast, such as a month, quarter, or year. This will provide a timeline for your projections.

Gather historical data

Collect and analyze financial data for the relevant components. This can include past revenue figures, expense breakdowns, cash flow statements, and other financial statements. The more detailed and accurate your historical data, the better foundation you will have for your forecast.

Determine the drivers

Identify the key factors influencing your financial performance. For example, in a sales forecast, drivers can include market demand, pricing strategy, marketing initiatives, and customer behavior. Similarly, in an expense forecast, drivers can include cost of goods sold, overhead expenses, and potential changes in the cost structure.

Develop assumptions

Based on your analysis of historical data and market trends, make assumptions about future conditions affecting your financial forecast. These assumptions can include factors such as revenue growth rates, inflation rates, interest rates, exchange rates, and industry trends. Ensure that your assumptions are realistic and align with the current and expected business environment.

Project revenues

Use your historical data, drivers, and assumptions to estimate future revenues. To perform this step, you can apply growth rates to historical revenue figures or use forecasting techniques such as trend analysis, market research, or customer surveys.

Estimate expenses

Similarly, project your future expenses based on historical expense patterns, drivers, and assumptions. Analyze your cost structure and consider factors that may impact expenses, such as inflation, changes in supplier costs, or planned investments in new resources or technologies.

Project cash flows

Based on your revenue and expense projections, estimate your cash inflows and outflows. Consider factors such as accounts receivable, accounts payable, inventory turnover, capital expenditures, and debt repayments. This will give you insights into your cash position and potential funding needs.

Review, refine, monitor and update

A financial forecast is not a one-time exercise. Once you have developed the initial financial forecast, review the results and validate them against industry benchmarks, internal targets, or expert opinions. Fine-tune your forecast as necessary to ensure it is realistic and aligned with your business goals.

Tips for financial forecasting

To help you excel at financial forecasting, here are some useful tips:

• Define the purpose of your forecast before you start. This will allow you to use the right metrics for evaluation and ensure your forecast targets your company’s goal.
• Before you forecast, make sure you have all historical data consolidated into a single source of truth. Doing this beforehand will allow you to eliminate bad quality data and inaccuracies which can significantly impact your forecast.
• Are you building short-term forecasts or long-term? The time frame you set will determine the period for your goals.
• What forecasting method applies to your company? Is statistical forecasting a better choice, rolling forecasting or maybe the Delphi method? By analyzing why you’re conducting a financial forecast, you can choose which method applies to your specific situation.
• Financial planning, budgeting, and forecasting are built for your entire organization’s objectives. However, do you know what different departments are working on to reach that goal? When you diversify your perspective with different department managers, you can forecast better results by applying scenarios from those departments.

Financial Planning – Your Action Plan to Ensuring Projected Financial Performance

Your financial plan sets long-term goals by understanding your budget and forecasting the results. You cannot develop a financial plan without an in-depth understanding of your financial budget, mainly because it gives you an overview of your current revenue and expenses.

What is financial planning?

Financial planning defines your financial goals by assessing your current financial performance and developing a strategy for efficiently managing your cash resources. A key element of financial planning is data analysis for accurate forecasting.

Key benefits of financial planning

A well-built financial plan offers numerous benefits, such as:

Setting Goals

Firstly, it gives you a clear roadmap of what and how your company can achieve in a given period. It helps identify key financial milestones, breaks them down into smaller goals, and defines how they can be achieved. With this, businesses can integrate financial planning and business strategy to make informed decisions and allocate resources effectively to drive growth and profitability.

Budget Management

Secondly, it allows you to manage your budget by understanding your revenue stream and expenses. It shows you the challenges in acquiring money, thereby helping you focus your efforts on streamlining the process on those focal points. Through this, you can allocate a budget towards improvements in production, marketing, customer support, or where you’re facing the problem.

Risk Mitigation

Thirdly, financial planning better equips your company to identify and mitigate risks. It gives an overview of expenses that can be cut down and how much cash flow can be set aside. A financial plan prepares a document where you can understand how much cash can be set aside for contingency management and reduce your loss.

Roadmap to Growth

Finally, a solid financial plan gives investors an in-depth account of budget allocation, current financial position, necessary investment, and risk management. Creating a plan for the next five or so years will outline your financial history, potential risks, and managing budgets to allocate those risks.

Ensuring Financial Success with Financial Budgeting, Planning, and Forecasting

The trio of financial planning, budgeting, and forecasting forms the backbone of an organization’s journey toward long-term success. By synergizing these three essential components, businesses can reap multiple benefits.

Primarily, it fosters financial stability and sustainability by ensuring the informed allocation of resources, aligning them with the organization’s strategic goals. In addition, it supports robust risk management by pinpointing potential financial hazards and implementing proactive measures to counteract them. Furthermore, the cohesive approach promotes transparency and accountability, allowing organizations to track their financial performance, detect discrepancies between projected and actual outcomes, and implement corrective actions as needed.

In summary, the seamless collaboration of financial planning, budgeting, and forecasting equips organizations with a holistic framework that enables well-informed decision-making, adept navigation of uncertainties, and the realization of enduring success.

To summarize, financial planning, budgeting, and forecasting aid stakeholders with relevant data to be better prepared for unforeseen circumstances. It equips them with the necessary information and foresight to evaluate critical decisions and set budgets in place to successfully drive the business to its forecasted goal.

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Key Takeaways

• Financial budgeting helps understand a company’s financial health by evaluating available resources, allowing better planning for business growth, resource allocation, and ROI analysis.  
• For effective financial budgeting, you need to: understand goals, estimate income and revenue, identify expenses (fixed, variable, one-time), and define the budget.  
• Some of the common mistakes organizations make with financial budgeting are misunderstanding variables, failing to revise the budget, relying on single-scenario budgeting, and setting unrealistic goals.
• There are four types of financial forecasting methods: bottom-up, top-down, correlation, and statistical forecasting, each suited for different situations.
• To conduct accurate financial forecast, organizations must: define the purpose, ensure data accuracy, determine the forecast time frame, select the appropriate forecasting method, involve different departments, and continuously monitor the forecast.
• Financial planning, budgeting, and forecasting work together to ensure financial stability, risk management, transparency, and informed decision-making, contributing to long-term business success.

What are the types of budgets?

There are four types of financial budgets:

• Incremental
• Value proposition
• Activity-based

What are some financial planning methods?

There are five methods of financial planning:

• Cash flow management
• Forecasting
• Investment analysis
• Risk management

What is zero-based budgeting?

Zero-based budgeting (ZBB) is where expenses are approved and justified at the beginning of the year. Unlike traditional budgeting, ZBB is based not on history but on the company’s efficiency. The budgeter reviews the expenditure at the beginning of the budget cycle and justifies it for funding.

Why is financial budgeting important?

A financial budget tracks your revenue and expenses. It presents your cash available for expenses and plan for potential future risks by reducing extra expenses and appropriately allocating revenue. Through a financial budget, you can build informed objectives for the upcoming month/year.

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How to Create a Financial Plan for Your Business

Home » Blog » How to Create a Financial Plan for Your Business

A wise old Certified Public Accountant gave me some priceless advice when I began my entrepreneurial journey.

“If the math doesn’t work, neither will your business.” 

Upon seeing my blank expression, he explained it a little further.

“A successful business earns more than it spends, and you ensure that happens (within reason) by creating a financial plan that controls every dollar you make.”

How so? I asked.

“Because your financial plan empowers you to control your cash flow, prepare for uncertainties, and take advantage of future opportunities.”

That’s when I knew I needed one.

If so, my step-by-step guide explains how to create a business financial plan that reflects your goals and controls every dollar you make.

What is a financial plan?

At its most basic level, a business financial plan is a document that shows you what money flows in and out of your business, how you earn it, and where you spend it. 

Similar to businesses, no 2 financial plans are the same.

However, a solid financial plan contains several components, including an income statement, cash flow statement, personnel plan, balance sheet, financial projections, and break-even analysis. 

Together, these enable you to control your budget, highlight potential future risks, set goals, calculate your funding requirements, and implement strategies to achieve them. 

While there’s no such thing as a sure thing in life, your financial plan brings your future into your present so that you can control it now.

Why is a financial plan important for a small business?

As you know (or will when you start your business ), entrepreneurs work long hours and make many decisions to ensure their business is on track. A business financial plan helps remove uncertainty from those decisions, replacing it with figures you can rely on and preparing you to take full advantage of investment opportunities when they arise. 

Here’s what Warren Buffet says about opportunities:

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

Your financial plan ensures you’ve got a bucket!

We also use a financial plan to control our cash flow, forecast our future financial business performance (including our income, expenses, and profitability), and stay within budget. 

Together, these help us maximize our assets, confidently navigate any problems during our entrepreneurial journey, and convince investors to believe in our vision. 

What is the difference between a business financial plan and a personal financial plan?

While most financial plans include the same information, some essential differences exist between business and personal plans because your goals likely differ from those of your SMB.

For example, an individual’s financial plan might include retirement, investment strategies, a minimum annual income to reduce tax liabilities, and securing an estate for their children.

In contrast, a business’s financial plan might focus on hiring additional staff, increasing inventory, bringing new products online, expanding into other markets, and even a new brick-and-mortar location. 

As you can see, the goals differ from one to the other, as might yours. That’s why a financial plan is as unique as the business it serves; however, some elements are vital for every financial business plan! 

The key components of a business financial plan

We now know that a thorough financial plan is imperative to the success and stability of your small business. 

Here are the components that can help make that happen:

• Income Statement: Contains information on your revenue, profits, and losses.
• Cash flow statement: Documents how money flows in and out of your business. 
• Balance sheet: Shows your business assets and expenses at a specific time.
• Financial projections: This helps predict your future income and expenses.
• Personnel plan: Identifies if and when you should hire employees.
• Break-Even Analysis: Confirms when you’ll make a profit.

Okay, now let’s look at how you use them to create yours:

How to Create a Business Financial Plan

To create your business financial plan, you must first collect financial information relevant to the 6 critical components you’ll use for its structure. 

Budding entrepreneurs who have yet to start their businesses might be wondering, `How do I collect information I haven’t got?` 

Good point!

Here’s where your business plan comes into play because it contains a financial section that includes your startup and running costs , financial projections, and break-even analysis. 

And those are 3 of the critical components in your business financial plan!

1. Income statement

An income statement (also known as a pro forma income or profit-and-loss statement) contains information on revenue, profits, losses, and fixed and variable operating expenses over a specific period, such as monthly, quarterly, or yearly.

It includes 2 columns containing your income and expenses and, at the bottom, your net profit or loss total.

Here’s an example of how it should look:

• Cost of goods sold (COGS) and operating expenses: These are the direct costs of producing your goods or services and the costs for running your business, such as rent, utilities, wages, insurance, licenses, etc.
• Revenue streams: Usually direct sales or ongoing subscriptions/
• Total net profit or loss: Subtract your costs (and taxes) from your total gross profit.
• Net income: Your total income after you subtract your expenses and taxes.

Next comes your cash flow statement, which might initially look like your income statement, but there are distinct differences.

Your income statement calculates your business’s revenues, expenses, and profits and reflects its financial performance. Your cash flow statement shows where you earn and spend your money, which is essential for staying within budget and paying your bills. 

2. Cash flow statement

Most small businesses need regular cash injections to survive.

But did you know that a lack of cash is the number one reason 82% of small US businesses fail? Source: USChamber.com .

So, it’s crucial to control it using a cash flow statement. 

A cash flow statement for established businesses could include bank statements showing credits (profits) and debits (expenditures). Startups with little cash flow information could include their startup and running costs and any funding sources. 

You can create a cash flow statement using two columns, one for your income and the other for your expenditures. 

And add the name, date, and invoice/receipt number to each transaction to make it easy to follow and correlate with your invoices and receipts. Trust me, your bookkeeper will love you for it!

3. Balance sheet

Your balance sheet is a financial snapshot of your business at a specific moment that lets you view your liabilities, assets, equity, and any up-and-coming extra expenses.

You use a balance sheet to subtract your debts (liabilities) from what you own (assets) to show you your net worth, also known as equity.

Let’s break those down so you know what they involve:

Liabilities: 

Your liabilities are business debts, such as outstanding inventory fees, utility bills, employee wages or compensation, and unpaid taxes.

These fall into 2 categories: current and fixed. 

• Your current assets can include your business bank balance, available cash, and outstanding invoices, known as accounts receivable.
• Your fixed assets include tangible things like your business property, equipment, vehicles, or land.

Note: Some businesses also have intangible assets, such as patents and copyrights.

Your business equity is the value of your assets minus your liabilities, which could also include any stock and share options.

4. Financial projections

A financial projection (also called an income projection) forecasts how much money you think might flow in and out of your business over a set period based on past performances or for startups on their business plan’s market research .

Financial projections can help you in several ways, including:

• Many small businesses need financial projections to identify and prepare for slow sales because of low seasonal demand or a shift in consumer buying trends.
• Your financial projections help you understand the cash you need to reach your business goals by estimating their costs.
• Most new businesses need solid (believable) financial projections to get funding, as they help show you can repay your debts.
• And to help entrepreneurs running a side hustle know when they can take it full-time .

To create your income projection, estimate your future sales income minus your fixed and variable expenses.

5. Personnel plan

Most businesses need the right people to meet their goals and maintain a healthy cash flow.

You use a personnel plan to determine whether to hire employees and if they should be full-time, part-time, freelancers, or contractors on a need-only basis. 

Your personnel plan also calculates employee costs like wages, benefits, worker’s compensation insurance, and payroll taxes to ensure you only hire when you can afford to.

6. Break-even analysis

Your break-even analysis projects when you’ll recoup your investment and earn more than your spending to run your business.

You calculate your break-even date by dividing your variable and fixed costs by your gross profit margin to get a financial figure your business must make to break even.

Need help to determine what your fixed and variable costs are?

No worries:

• Your fixed costs include expenses that remain the same regardless of how many products or services you sell. These include your rent, insurance policies, license and permit expenses , accounting fees, and wages.
• Your variable costs fluctuate relative to your sales or production volume.

The takeaway:

Your break-even analysis tells you the number of products or services you must sell to cover your business and production costs. 

Tips on creating an effective financial plan for your business

Preparation is the key to creating a business financial plan, and you prepare by setting goals, assessing present and future credit needs, estimating every business expense, planning for contingencies, and seeking professional financial advice if required. 

And once your plan is in place, regular monitoring helps ensure your business is on its financial target.

Let’s look at how you do it:

Set your financial goals

Your goals are relative to your business. Some examples include forming an LLC , hiring employees, expanding your product range or services, entering a new marketplace, opening a new branch, or trading abroad.

You must define them (regardless of what they are) because your financial plan aims to help you achieve them.

Consider this proverb when choosing your financial business goals:

“The art is not in making money, but making your money work for you.”

And that’s pretty much the secret to how people get rich!

That’s why now is the time to define your goals and create a strategically driven financial business plan that guides every business decision and ensures you maximize your investments.

Speaking of which!

Know your credit needs 

Your business credit needs are any loans you require when starting, running, or expanding your business.

As most small business owners know, the golden rule in running a small business is to minimize your expenditures because the less money you borrow, the higher your profits and the more accurate your business financial plan will be.

But sometimes, we must borrow to exploit market opportunities , buy equipment, or expand, and knowing your credit needs (and score) can help you get the best deals.

Include those little expenses

No income or expense is too small to consider when running a business that relies on a consistent cash flow.

Benjamin Franklin put it this way:

“Beware of little expenses. A small leak will sink a great ship.” 

The problem many new business owners experience is that it’s easy to account for significant expenses (especially fixed costs), but it’s the small, variable everyday ones that can catch us out and scupper our budget. 

To avoid a sinking feeling, evaluate your monthly fixed and variable expenditures and avoid unnecessary, unbudgeted expenses at all costs.

Monitor your goals

Creating your financial plan is your first step, implementing it the second, and monitoring it the third because that’s how you ensure your strategies are achieving your financial goals. 

To monitor your goals, use those key elements of your business financial plan, including your income and cash flow statement, balance sheet, and financial projections, as they provide an up-to-date assessment.

Regular monitoring also helps you identify potential problems and implement any changes before they harm your business’s financial health. 

Plan for contingencies

Planning for problems relative to your niche, like seasonal fluctuations and new competitors, is standard best business practice. But as recent history has taught us, we must also prepare for the unforeseeable!

You can spot worst-case scenarios (like a falling income) by evaluating your business financial plan’s balance sheet and cash flow statement.

Some ways to plan for contingencies are to have a credit line available and cash reserves that can help keep you afloat should the going get rough. 

Consider hiring help 

Many of the most successful business leaders have a shared secret to their success!

They surround themselves with people who know more than they do about every aspect of their business. 

Steve Jobs explains it perfectly:

“It doesn’t make sense to hire smart people and tell them what to do; we hire smart people so they can tell us what to do.”

Fortunately, financial experts are available to help you create your business financial plan.

Consider hiring a financial advisor to inform you of prudent financial decisions and investments, and your bank manager can help assess your creditworthiness while considering any past problems that could affect present loan applications.

Financial planning FAQs

What is a business financial plan.

An effective business financial plan contains your business goals and outlines your strategies.

It’s a GPS that guides your SMB’s financial activities by ensuring you make informed decisions on how and where to invest your resources. 

How do you write a business financial plan?

Your financial plan begins with a strategic plan that contains your business goals and what you’ll need to achieve them.

Next, you must create your financial projections, plan for contingencies, and monitor to assess your actual results against your projections to adjust if required. 

What are the 6 components of a financial plan?

Financial plans are as unique as the business they serve. However, 6 components you must include are:

• Cash flow statement: Documents how money flows in and out of your business.
• Personnel plan: Identifies whether you should hire employees.
• Break-Even Analysis: Confirms when you'll make a profit.

What is the best financial statement for a small business?

Your income statement best assesses your business’s financial performance, containing your profits, losses, and equity.

Your balance sheet and cash flow statement are also crucial for running a profitable business. 

Entrepreneurs need many skills, and one of the most important is financial intelligence because it ensures we keep our fingers on our businesses’ financial pulse.

Learning how to create a business financial plan is a great way to gain that skill.

And when you control your income and expenditures, you take control of your business’s financial destiny. Sweet.

One last thing to remember when creating a business financial plan.

The numbers never lie!

This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.

Terry OToole

Terry is a serial entrepreneur with over 25 years of experience building businesses across multiple industries – construction, real estate, e-commerce, hotelier, and now digital media. When not working, Terry likes to kick back and relax with family, explore Taoism’s mysteries, or savor the taste of fine Italian red wine.

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• Initiate with Your Business Concept: Lay the Groundwork: Start by introducing your business idea into Plannit AI's Business Plan Generator. This first step is crucial, as it sets the tone for a tailored, insightful business plan that truly resonates with your vision. Capture the Essence: Our platform is designed to grasp the nuances of your concept, ensuring that the generated plan accurately reflects the core and potential of your business.
• Navigate Through the AI-Guided Questionnaire: Tailored Interactive Experience: Plannit AI’s AI-guided questionnaire is your interactive guide through the planning process. It meticulously gathers information about your business's objectives, strategies, and market positioning, ensuring a comprehensive and reflective plan. Intelligent Feedback and Suggestions: As you progress through the questionnaire, benefit from smart prompts and suggestions, ensuring that your plan is not just detailed but also strategically sound and aligned with industry standards.
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How to Write a Business Plan?

• Roadmap for Success: At its core, a business plan acts as a strategic guide, providing detailed steps on how your business will achieve its objectives. It helps you navigate the startup phase, manage growth effectively, and tackle unforeseen challenges with a well-thought-out strategy.
• Securing Funding: For startups and businesses looking to expand, a business plan is crucial for securing loans or attracting investors. It demonstrates to potential financial backers that your business has a clear vision, a solid strategy for profitability, and a plan for delivering returns on their investment.
• Informed Decision-Making: A well-prepared business plan offers valuable insights into your market, competition, and potential challenges. This information is vital for making informed decisions, from day-to-day operations to long-term strategic shifts.
• Market Analysis and Strategy: It allows you to conduct an in-depth analysis of your target market, understand customer needs, and position your product or service effectively. The marketing strategy outlined in your business plan helps in identifying the best channels and tactics to reach your audience and achieve market penetration.
• Financial Planning: One of the most critical components of a business plan is the financial forecast. It outlines your funding requirements, expected revenue, profit margins, and cash flow projections. This section is essential for budgeting, financial management, and ensuring the financial viability of your business.
• Goal Setting and Performance Measurement: A business plan sets clear, measurable goals and objectives. It provides a framework for monitoring performance, measuring success, and making necessary adjustments to stay on track.

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Free Annual Business Budget Templates

By Andy Marker | January 6, 2021

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We’ve compiled the most useful free annual business budget templates, including those for established companies, startups, and marketing teams. You’ll also learn more about what goes into creating an annual business budget. 

Included on this page, you'll find an annual business budget template , a first-year budget calculator , an annual startup business budget template , and an annual marketing budget template . Plus, we offer helpful tips for using an annual business budget template .

Annual Business Budget Template

Download Annual Business Budget Template

Excel | Google Sheets

Use this easy-to-fill annual budget template to gain year-over-year insight into your business’s expenditures and revenue. Enter planned employee, office, marketing, training, and travel costs, and use the respective tabs to track actual expenses and calculate your expense variance (the disparity between planned and actual expenses). A unique expense analysis tab provides a dashboard view of your planned vs. actual expenses, variance, and variance percentage. 

If you are looking for budget templates for nonprofits, check out this article for a vast variety of budget templates suitable for any nonprofit organization. 

First-Year Budget Calculator

Download First-Year Budget Calculator

Use this simple first-year budget calculator to determine whether your budding business has adequate resources to meet its financial obligations. Enter operating expenses (e.g., operations, marketing, occupancy, inventory, etc.) and employee salaries to compare startup costs to monthly expenditures. This first-year budget calculator features a section for personal finance details and how they might affect your organization’s overall budget outlook.

Annual Operating Budget Template

Download Annual Operating Budget Template

Use this annual operating budget template to gain year-over-year insight into how your organization’s expenditures relate to revenue. Enter total income, total expenses, and total savings to arrive at your month-by-month net income. Add salary or details, any interest income, refunds and reimbursements, and any other miscellaneous costs to help identify budgeting shortfalls and ensure your business is on sound fiscal footing.

You can find more operating budget templates in this article .

First-Year Startup Budget Calculator

Download First-Year Startup Budget Calculator

This template is ideal for startup companies that want to contrast their funding with expenditures to avoid any financial shortfalls. Use this template to ensure that your first-year budgeting calculations (startup costs, operational expenses, estimated and actual income, and any personal expenses) are as accurate as possible. Save this calculator as a one-off file with customized entries, or share it as a template with team members to standardize budgeting practices. 

Annual Startup Business Budget Template

Download Annual Startup Business Budget Template

Gain a year-over-year perspective of annual revenue vs. expenses with this startup-specific annual business budget template. Enter revenue (sales, commissions, and investments, etc.), expenses (salaries/wages, operations, marketing, etc.) and use the Summary tab’s dashboard-like view to see current budgeted expenses compared to actual revenue. Get a grasp on the bottom line by itemizing each expense and revenue source. Then, use that data to monitor your proximity to profitability.  To find more, please refer to our collection of free startup budget templates  and free small business budget templates . 

Printable Annual Budget Report Template

Download Printable Annual Budget Report Template 

Excel |  Word | PDF

Gain important insights into the overall health of your company’s budget with this print-friendly month-by-month and year-over-year budget report. Enter income (salaries, dividends/interest, etc.) and expenditures to determine your organization’s true annual income. You can share this annual budget report template as a one-off budget report, or use it as a template to fit all annual budget reporting needs.  

Annual Marketing Budget Template

Download Annual Marketing Budget

This annual budget template is designed specifically for marketing organizations — use it to compare estimated marketing campaign costs against actual costs. Enter expenses (national and local marketing, public relations costs, content marketing, social media, advertising, etc.) to get an overview of where you need to reign in costs to meet marketing budget goals. This template, with line-by-line, pre-filled, marketing-specific expenses, takes the guesswork out of accounting for each cost. You can also customize this budget template to meet your needs.

Why You Need an Annual Business Budget Template

An annual business budget template offers a single or year-over-year comparison of expenditures compared to revenue. The pre-filled information in an annual business budget template guides you through the annual budgeting process, so you can leverage pre-set criteria to gain insight into the accuracy of business’s expenses and revenue sources. 

In short, an annual business budget template provides you with visibility into your business’s true financial picture with an easy-to-use, pre-set list of projected and actual expenditures and revenue sources, and any differences between them. An annual business budget template allows you to enter planned salary, office space, marketing, training, and travel costs in order to calculate at your expense variance. 

While annual budget templates are useful for evaluating expenditures vs. revenues annually, you can also assess your budget’s feasibility quarterly or over your first business year. This information can help you create a budget that allows your business to continue operating with a sound financial outlook.

Tips for Using an Annual Business Budget Template

An annual business budget template features detailed, line-by-line lists of pre-set expenses and income. Use a completed budget to project the cost of year-by-year operations compared to available resources in order to justify your operational expenses. 

Use the preset criteria in an annual business budget template to determine the overhead and administrative costs related to your products or services and to make any adjustments. 

To ensure that you account for your business’s expenditures compared to potential — and actual — revenue, an annual business budget template should include the following sections: 

• Employee Costs: This is a line-by-line account of projected and actual labor-related business expenses (e.g., salaries, wages, benefits, insurance, bonuses, etc.).  
• Office Costs: This cost refers to the planned and actual occupancy costs (e.g., lease, electric, water, internet access, office supplies, security, etc.) of your establishment. 
• Marketing Costs: Include any anticipated marketing budget details (e.g., website hosting, collateral production, trade shows, etc.).
• Training/Travel Costs: Enter employees’ training costs (classes, webinars, certifications, etc.) and any related travel expenses. 
• In-House Income: Add the planned and projected revenue sources (e.g., sales, fees, commission, service charges, etc.). 
• Investment Income: This section covers funding from banks (dividends, loans, interest, etc.) and investor contributions. 
• Expense Variance: Determine the difference between projected and actual expenses.  
• Income Variance: Identify the difference between projected and actual expenses.
• Summary: Get the big picture of your business’s budget, as well as the variance between anticipated and actual expenses and income sources, so that you can continue to operate successfully. 

Additionally, be sure to consider one-time costs in your annual business budget. Seasonal costs may also impact your budget, as well as any promotional events on which you plan to spend more on advertising or marketing campaigns to boost sales. These expenses can affect your business’s annual revenue projections.

Better Manage and Track Annual Business Budgets with Smartsheet

Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change. 

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. 

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time.  Try Smartsheet for free, today.

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7-step guide to financial forecasting & planning for any business

What is financial forecasting, why is it important, and how to properly conduct financial planning and forecasting

• What is financial forecasting?
• Why is it important?
• 4 common types of financial forecasting
• How to do financial forecasting in 7 steps
• Financial forecasting FAQs

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Uncertainty is one of the constant aspects of doing business. Many factors beyond your control can potentially influence the market in ways you didn't expect. For example, new technologies are constantly changing operations across almost all industries at a fundamental level. 

It pays to know what to expect in the near future and plan ahead, hence the need for financial forecasting. Every business (including monopolies) could benefit incredibly from regular  financial forecasting . Here is a comprehensive guide on the importance of financial forecasting for your business model and how to do it.

Failure to conduct regular financial forecasting leaves you flying blind.

What is financial forecasting? 

Financial forecasting refers to financial projections performed to facilitate any decision-making relevant for determining future business performance. The financial forecasting process includes the analysis of past business performance, current  business trends , and other relevant factors.

However, some aspects of financial forecasting may change depending on the type and purpose of the forecast, as will be discussed later. 

Importance of financial forecasting 

Hypothetically speaking, failure to conduct regular financial forecasting leaves you flying blind. Regular forecasting has extensive benefits for some of your business' fundamental operations, including: 

Annual budget planning 

A budget represents your business' cash flow, financial positions, and future goals and expectations for a set fiscal period.  Financial forecasting and planning  work in tandem, as forecasting essentially offers an insight into your business' future—these insights help make budgeting accurate.  

Establishing realistic business goals 

Accurate forecasting will help predict whether (and by how much) your business will grow or decline. As such, you can set realistic and achievable goals—and manage your expectations. 

Identifying problem areas 

Financial forecasting  can help you identify ongoing problems by analyzing the business' past performance. Additionally, you can identify potential problems by getting an insight into what the future holds. 

Reduction of financial risk 

You risk overspending by creating a budget without financial forecasting. In fact, most of your financial decisions would be ill-informed without the input of a financial forecast's results. 

Greater company appeal to attract investors 

Investors use a company's financial forecast to predict its future performance—and the potential ROIs on their investments. Additionally, regular forecasting shows your investors that you are in control and have a solid business plan prepared for the future.

4 common types of financial forecasting 

Businesses conduct financial forecasting for varying purposes. Consequently, forecasting practices are categorized into four types: 

1. Sales forecasting 

Sales forecasting entails predicting the amounts of products/services you expect to sell within a projected fiscal period. There are two sales forecasting methodologies: top-down forecasting and bottom-up forecasting. 

Sales forecasting has many uses and benefits, including budgeting and planning production cycles. It also helps companies manage and allocate resources more efficiently. 

2. Cash flow forecasting 

Cash flow forecasting  entails estimating the flow of cash in and out of the company over a set fiscal period. It's based on factors such as income and expenses. It has many uses and benefits, including identifying immediate funding needs and budgeting. However, it is worth noting that cash flow financial forecasting is more accurate over a short term. 

3. Budget forecasting 

As a financial guide for your business' future, a budget creates certain expectations about your company's performance. Budget forecasting aims to determine the ideal outcome of the budget, assuming that everything proceeds as planned. It relies on the budget's data, which relies on financial forecasting data. 

4. Income forecasting 

Income forecasting entails analyzing the company's past revenue performance and current growth rate to estimate future income. It is integral to doing  cash flow  and balance sheet forecasting. Additionally, the company's investors, suppliers, and other concerned third parties use this data to make crucial decisions. For example, suppliers use it when determining how much to credit the company in supplies. 

How to do financial forecasting in 7 steps 

Many integral aspects of your company's current and future operations hinge on the results of your financial forecasts. For example, forecasting results will influence investors' decisions, determine how much your company can get in credit, and more. 

As such, accuracy cannot be overemphasized. Here is a step-by-step guide to ensure that you do it right: 

1. Define the purpose of a financial forecast 

What do you hope to learn from the financial forecast? Do you hope to estimate how many units of your products or services you will sell? Or perhaps you wish to see how the company's current budget will shape its future? Defining your financial forecast's purpose is essential to determining which metrics and factors to consider when doing it. 

2. Gather past financial statements and historical data 

One of the components of financial forecasting involves analyzing past financial data, as explained. As such, it is important to gather all relevant historical  data and records , including: 

• Liabilities 
• Investments 
• Expenditures 
• Comprehensive income 
• Earnings per share 
• Fixed costs

It's important to ensure that you gather all required information as your financial forecast's results will be inaccurate if you exclude relevant data.

3. Choose a time frame for your forecast 

Financial forecasts are designed to give business owners an insight into the company's future. You get to decide how far into the future to look, and it can range from several weeks to several years. However, most companies do forecasts for one fiscal year. 

Financial forecasts change over time as factors such as business and market trends change. Consequently, it is worth noting that financial forecasting is more accurate in the short term than in the long term.

4. Choose a financial forecast method 

There are two financial forecasting methods: 

• Quantitative forecasting uses historical information and data to identify trends, reliable patterns, and trends. 
• Qualitative forecasting analyzes experts' opinions and sentiments about the company and market as a whole. 

Each method is suitable for different uses and has its strengths and shortcomings. However, qualitative forecasting is more suitable for startups without past data to which they can refer. 

5. Document and monitor results 

Financial forecasts are never 100% accurate and tend to change over time. As such, it is important to document and monitor your forecast's results over time, especially after major internal and external developments. It is also important to update your forecasts to reflect the latest developments. Using  forecasting software  to automate related tasks may help too.

6. Analyze financial data 

Regularly analyzing financial data is the best way to tell whether your financial forecasts are accurate. Additionally, continuous financial management and analysis helps you prepare better for the next financial forecast and gives you crucial insights into the company's current financial performance. 

7. Repeat based on the previously defined time frame 

Smart companies conduct regular financial forecasting to stay in the know and in control. As such, it is advisable to repeat the process once the time period set for the current financial forecast elapses. It's also prudent to keep collecting, recording, and analyzing data to improve your financial forecasts' accuracy.

Get accurate metrics for financial forecasting—absolutely free 

An efficient system of collecting, storing, and analyzing data is necessary for accurate financial forecasting. ProfitWell Metrics is a subscription analytics software designed to do all of this on one platform. Some of the metrics that you can get using this program include: 

• Monthly and annual recurring revenues 
• Market and customer segments 
• Customer acquisition and retention 
• Customer lifetime value 
• Churn rate 
• The average revenue per user 

ProfitWell Metrics collects and records all  important metrics , giving you enough data to work with when conducting a financial forecast. Additionally, the data collected in real-time offers crucial insights to help you update your forecasts and other projects accordingly. 

ProfitWell Metrics also integrates seamlessly with other popular data analytics programs, including Google Sheets and Stripe. More importantly, it's 100% free and secure. 

Take the headache out of growing your software business

We handle your payments, tax, subscription management and more, so you can focus on growing your software and subscription business.

Financial forecasting FAQs 

Some of the most frequently asked questions regarding financial forecasting include: 

What is the role of forecasting in financial planning? 

Financial forecasting estimates important financial metrics such as sales, income, and future revenue. These metrics are crucial for finance-related operations such as budgeting and financial planning as a whole. Consequently, forecasting functions as a guiding tool (or marking scheme) for financial planning. 

What is the difference between financial forecasting and modeling? 

On the one hand, financial forecasting entails predicting the business' future performance. On the other hand, financial modeling entails simulating how financial forecasts and other data may affect the company's future if everything goes according to plan. Financial modeling is done for very specific and often discrete purposes. 

What is the difference between financial forecasting and budgeting? 

Financial forecasting and budgeting work in tandem and are often misinterpreted as meaning the same thing. However, financial forecasting entails estimating and predicting the company's future performance (financially and in other aspects). On the other hand, budgeting is the company's financial expectations for the future (expectations based on financial forecasts and other data). 

What are the three pro forma statements needed for financial forecasting? 

Pro forma statements are financial reports designed to give insights into how different scenarios would play out based on hypothetical circumstances. There are three pro forma statements: 

• Pro forma statements of income 
• Pro forma cash flow statements 
• Pro forma balance sheets 

Pro forma statements may be hypothetical, but they help companies prepare for an uncertain future. Consequently, they're useful when conducting financial forecasts. 

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What Is a Financial Plan? (2024 Guide)

Holly Humbert is a freelance writer who is passionate about entrepreneurship, women in business and financial literacy. In addition to writing, Holly works in marketing helping clients harness the power of social media for their small businesses.

When she is not writing, she is testing out new recipes, tasting the newest Trader Joe’s finds or binging the latest true crime podcast. She resides in Utah with her husband, two daughters and dog, Max.

David Gregory is a sharp-eyed content editor with more than a decade of experience in the financial services industry. Before that, he worked as a child and family therapist until his love of adventure caused him to quit his job, give away everything he owned and head off to Asia. David spent years working and traveling through numerous countries before returning home with his wife and two kids in tow. His love of reading led him to seek out training at UC San Diego to become an editor, and he has been working as an editor ever since. When he’s not working, he’s either reading a book, riding his bicycle or playing a board game with his kids (and sometimes with his wife).

A financial plan is a comprehensive strategy outlining your current financial situation and actionable steps necessary to achieve short-term and long-term goals.

Key Takeaways

• A financial plan is a strategic roadmap to help you achieve your monetary goals. 
• Key components of a comprehensive financial plan include income streams, budgeting, debt and risk management, allocations, retirement planning and more.
• A well-structured financial plan provides clear insight into your financial life, leading to long-term financial health and stability. 

A financial plan is like a map to achieve your financial goals. It involves a clear understanding of your current financial status, creating financial objectives and implementing steps to achieve those goals.

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Learn more about our methodology and editorial guidelines .

Key Components of a Financial Plan

You can use a financial plan to accomplish a variety of goals — getting out of debt, saving for a house, preparing for retirement, etc. While the specifics will vary on a person-by-person basis, you generally need to include these key components: 

• Current financial standing : Make an honest assessment of your current financial status, including assets (what you own), liabilities (what you owe), income and expenses.
• Budget: Dive deep into your everyday expenses and income, ensuring your spending aligns with your saving objectives and goals. 
• Financial goals : Establish clear objectives to make your personal finance journey targeted and purposeful. Your goals can include funding education, saving for a home, getting out of debt, and much more. 
• Strategies : Adopt tailored strategies to help you achieve them. Financial strategies include tactics for increasing your income, reducing your debt, investing and more. 
• Insurance coverage : Have adequate insurance coverage, including health, disability, life, car and property insurance, to help protect you from unexpected financial losses and stop your financial plan from becoming unraveled. 
• Retirement and estate planning : Include details on how you’re going to achieve your retirement goals and how you want your assets distributed once you die. 

Benefits of Financial Planning

Financial planning brings a host of benefits. It serves as a guide for everyday financial decisions but can also lay the foundation for future security and wealth.

Creating Your Financial Plan

By methodically walking through the steps below, you can lay the groundwork for financial stability and success. 

1. Assess your current financial situation 

This comprehensive overview sets the stage for informed goal formation. Take inventory of your current financial reality, including your income, expenses, assets, debts and any other financial obligations. 

2. Set S.M.A.R.T. financial goals

S.M.A.R.T. stands for specific, measurable, achievable, realistic and time-bound and is a formula for creating achievable goals. Here’s how each aspect can help you set financial goals:

• Specific : Define your goal clearly. This can be easier in the financial realm because you can assign precise dollar amounts to your goals. Specific goals can enhance your motivation and are easier to track.

For example, instead of “I want to save for a house,” make your goal, “I will save $50,000 in 30 months for my down payment.” 

• Measurable : Without a destination, it’s difficult to know how much progress you’re making. You can measure your bigger financial goals with benchmarks to keep you motivated and on track.

For example, instead of “I will save more money,” make your goal, “I will save $50 a week by bringing lunch from home instead of eating out.” 

• Achievable: It’s important to strike a balance between overly ambitious and modest goals. If you have a particularly large goal, create mini-milestones that promote a sense of accomplishment. 

For example, instead of “I will increase my income by $50,000 next year,” make your goal, “I will initiate a side hustle that increases my income by $300 each month within the next two months.”

• Realistic: Your financial goals should be both challenging and attainable — if they’re not, you could end up feeling discouraged and unmotivated. Ensure your financial goals are realistic compared to your circumstances.

For example, instead of “I will become a millionaire in two years,” make your goal, “I will invest 15% of my income to grow my net worth.” 

• Time-bound: Have a specific deadline. This will help keep you accountable as well as help you stay on track and use your resources effectively.

For example, instead of “I will pay off my house,” make your goal, “I will put an extra $200 toward my principal mortgage balance each month to pay off my home in nine years.” 

Consider meeting with a financial planner or advisor who can help walk you through these steps and give insights to help you craft a financial plan. 

3. Calculate your net worth

Your net worth is your assets minus your liabilities. An asset is anything you own that has monetary value, including cash and cash equivalents, real estate, investments and personal property (e.g., cars, collections or jewelry). Liabilities are obligations you owe, including a mortgage, credit card debt and loans (e.g., car, personal or student loans). 

Net worth can be either positive or negative (if your liabilities outweigh your assets). The best way to increase your net worth is by reducing your liabilities while increasing your assets. 

4. Create a budget

Budgeting is a strategy for ensuring each dollar has a specific role. Following a budget can help prevent wasteful spending on unnecessary purchases, 

For those new to budgeting, zero-based budgeting is a great place to start. This method involves creating a detailed list of your income and expenses for the upcoming month. You should direct any extra funds to a category — this can be saving up for a future expense or investing it for your financial future. 

Another budget plan is the 50/30/20 strategy . This plan aims for you to put 50% of your money toward needs (food, housing, etc.), 30% toward wants (entertainment, hobbies, etc.) and 20% toward savings and debt repayment. 

At the end of each month, no matter what budget plan you use, review how the last month went and note any categories where you under- or overspent. Using this information, readjust your projected expenses for the following month. 

5. Reduce high-interest debt

Reducing high-interest debt frees up significant monthly cash and saves you from paying a hefty amount of interest. The debt snowball method is a popular strategy for debt repayment. It involves listing your debts from the smallest principal balance to the largest and then funneling all excess monthly cash flow to the smallest debt (while continuing to make the minimum monthly payment on all your other debts). 

Once you’ve paid off the smallest debt, you’ll roll that payment (both the minimum and any extra) into the next smallest debt. This process continues until you’ve repaid all your debts. 

6. Build an emergency fund

The majority of Americans struggle to cover a $500 emergency. Having a rainy day fund can protect you against having to borrow money or stress about unexpected expenses.

It’s commonly suggested you have three to six months’ worth of expenses saved in a liquid emergency fund, but this will vary based on your personal risk tolerance. You should store this fund away from regular accounts to avoid dipping into it when it’s not a true emergency. Consider putting it into a high-yield savings account where you can earn interest.

It’s also important to consider other types of emergency protection such as long-term disability and life insurance, especially if you have dependents. 

7. Open investment accounts

There are multiple types of investment accounts you can choose from. Some may be specific for retirement, such as a 401(k) or an individual retirement account (IRA), while others, such as a high-yield savings account (HYSA), are everyday accounts.

Investments are part of a long-term plan, taking advantage of compound interest and growth over many years. Working with a financial advisor can help you figure out what investments would be right for your situation and risk tolerance levels. 

The Bottom Line: Financial Planning

Financial planning is a dynamic process that requires regular review and adjustment. A financial plan outlines your current financial status, goals and the steps and strategies necessary to achieve your financial objectives.

Essential components of a financial plan include income, debts, risk, budgeting, investments and retirement and estate planning. Periodically reassessing your plan can help ensure it stays aligned with your current situation and future goals.

FAQ: What Is a Financial Plan?

What are the key elements of a financial plan.

The key elements of a financial plan are assessing your current financial standing, creating S.M.A.R.T. goals, calculating your net worth, creating a budget, reducing high-interest debt, building an emergency fund and opening investment accounts.

How often should I review and update my financial plan?

You should revisit your financial plan at least once per year. If you experience significant life events or financial fluctuations, it may be necessary to adjust your financial plan every few months.

What are some common mistakes to avoid when creating a financial plan?

Common pitfalls include setting goals that are not specific, measurable, achievable, relevant and time-bound. Other common mistakes include underestimating your expenses, particularly those that are less frequent or unexpected, ignoring debt and failing to update your financial plan as your life evolves.

Editor’s Note: Before making significant financial decisions, consider reviewing your options with someone you trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.

Newsom and Democratic lawmakers detail first California budget cuts totaling $17 billion

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California Gov. Gavin Newsom and leaders of the state Senate and Assembly announced an agreement Thursday to cut $17 billion from the state budget in April, providing the first details of their plan to begin to tackle the state’s massive deficit.

The plan calls for delaying $1 billion in grant funding for transit and intercity rail projects, saving $762.5 million by pausing hiring for open state jobs and pulling back $500 million from a program to help districts pay for K-12 building projects, among other proposals to trim the shortfall now, before additional cuts are made this summer.

“We are able to meet this challenge thanks to our responsible fiscal stewardship over the past years, including record budget reserves of close to $38 billion,” Newsom said in a statement. “There is still work to do as we finalize the budget and I look forward to the work ahead together to continue building the California of the future.”

The agreement marks a redo of a fumbled budget announcement made last month when Newsom and legislative leaders heralded a premature deal without disclosing an exact amount of funding they intended to cut or detailing a single program that would be affected.

Newsom and Democrats announce a plan to reduce the enormous budget deficit. How? TBD

Facing a shortfall of at least $38 billion, Gov. Gavin Newsom and legislative leaders said they have agreed to $12 billion to $18 billion in cuts but offered no details.

March 21, 2024

Lawmakers and the governor are scrambling to reduce California’s budget deficit, which Newsom estimated at $37.9 billion in January, before the fiscal forecast is updated in the coming weeks to likely show California in an even deeper budget hole. Estimates from the Legislative Analyst’s Office have suggested the deficit next year could be nearly twice as high as Newsom’s forecast.

Lower-than-expected revenues, delayed tax deadlines and overspending based on inaccurate budget projections created California’s grim financial picture. The state budget relies heavily on capital gains taxes paid by California’s highest earners, making state revenues subject to volatility in the stock market.

Republicans have criticized the lack of transparency into state budget negotiations and contend Democrats created the fiscal crisis by continuing to fund expensive programs, such as the expansion of Medi-Cal to all low-income immigrants, even as state revenues drop.

Assembly Republican Leader James Gallagher (R-Yuba City) called the budget deal “a swing and a miss from Democrats.”

“California’s budget has major league problems and Newsom is proposing JV solutions,” Gallagher said.

The first round of cuts could be voted on as early as next Thursday.

Democrats also agreed to pull $12.2 billion from state reserve accounts to cover the shortfall when the final budget is approved later on. The early cuts combined with the planned dip into the reserves will trim $29.5 billion off the deficit.

“We are all committed to delivering an on-time balanced budget, and this early action agreement is a critical first step to shrink the state’s shortfall,” said Senate President Pro Tem Mike McGuire (D-Healdsburg).

Because the shortfall this year is so large, Newsom has urged the Legislature to take “early action” to begin to whittle away at the deficit now, long before the June 15 deadline to pass a budget.

The cuts Democrats agreed to make this month are largely considered the easier choices, allowing them to focus on tougher deliberations that will come later on this spring. Reducing the deficit before Newsom unveils his revised budget proposal in May could also lessen the public perception of the state’s fiscal woes by trimming the deficit figure before it is expected to grow.

Voters say California’s budget deficit is an ‘extremely serious’ problem, poll finds

What do voters think about the governor and potential solutions to the state’s looming budget deficit?

Jan. 18, 2024

The struggle to reach a consensus up until this point foreshadows the difficult work ahead in May and June for a Legislature and governor with little experience leading through a fiscal crisis as they weigh challenging choices that affect millions of Californians.

The agreement announced Thursday largely mirrors a plan the Senate put forward weeks ago to “shrink the shortfall” by $17 billion, which aligned with many of Newsom’s proposals to begin to offset the deficit.

The Assembly, where Democrats hold 62 of 80 seats under a new speaker , took a little longer to reach a consensus. This week, the lower house said it pushed back on some of the governor’s proposed cuts to housing and homelessness programs, which were ultimately left out of the early action deal. At the Assembly’s urging, the agreement also authorizes the administration to pause one-time spending from prior budget years that has not yet been dispersed.

Assembly Speaker Robert Rivas (D-Hollister) said his chamber’s approach was the “right way to come at closing such a massive shortfall” and that he expects Newsom “to deliver challenging budget proposals next month to reduce the deficit in the long-term.”

The agreement, according to Newsom and legislative leaders, includes:

• Saving $762.5 million by declining to fill vacant state positions.
• Cutting $500 million from the School Facility Aid Program, which funds K-12 building projects.
• Delaying $1 billion in funding for the state’s Formula Transit and Intercity Rail Capital Program.
• Delaying $550 million for a grant program to build facilities to expand preschool, TK and full-day kindergarten.
• Paying state workers on July 1 instead of June 30 to push $1.6 billion in payments into subsequent budget years.

The full list is available here . More details of the plan will be revealed when lawmakers introduce bill language, possibly next week.

More to Read

Newsom called it a ‘gimmick.’ Now he’s using the trick to lower California’s massive deficit

April 11, 2024

Newsom cuts $2.9 billion from California climate programs, delays an additional $1.9 billion

Jan. 11, 2024

Column: Newsom’s budget plan reflects his rosy view of the economy

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Taryn Luna covers Gov. Gavin Newsom and California politics in Sacramento for the Los Angeles Times.

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Are you ready to buy a house? Take our quiz and find out.

Homeownership is how many Americans accumulate wealth, and it’s an important life goal for millions. But affording a home is a growing challenge — if not out of reach entirely — for many people.

In the past three years, mortgage rates have more than doubled and are now at nearly 7 percent on a typical 30-year loan. And they are unlikely to drop significantly this year . Even those who can swing an all-cash purchase, experts say, still have plenty of other expenses to consider, including maintenance and insurance.

So, should you buy a home right now? To help you decide, take this quiz.

Question 1 of 9

What type of home are you looking to buy.

Question 2 of 9

What is your living situation.

Question 3 of 9

How would you characterize your financial situation.

Question 4 of 9

How much do you expect to have for a down payment.

Question 5 of 9

What is your credit score.

Question 6 of 9

How much debt do you have include credit cards and student, auto or personal loans, etc..

Question 7 of 9

How much are you willing to pay for a mortgage rate.

Question 8 of 9

How do you expect your mortgage payment to change your existing budget.

Question 9 of 9

How long do you plan to own this home.

You need to answer every question to see your result. You’re missing questions 1, 2, 3, 4, 5, 6, 7, 8 and 9 .

About this story

Editing by Karly Domb Sadof, Rivan Stinson, Betty Chavarria and Robbie Olivas DiMesio.