How to Create a Business Budget: A Practical Guide

A budget isn’t about restricting what you can spend. It’s about having a plan—knowing where your money should go so you can make intentional decisions instead of wondering where it went.

Many small business owners skip budgeting because it feels complicated or time-consuming. It doesn’t have to be. This guide gives you a practical approach to creating a budget that actually helps you manage your business.

Why Budget?

Before diving into how, let’s address why:

Planning: A budget forces you to think ahead. What revenue do you expect? What expenses are coming? This prevents surprises.

Decision making: “Can I afford to hire?” “Should I buy this equipment?” With a budget, you have a framework for answering these questions.

Control: When actual expenses exceed budget, it’s a signal to investigate. Without a budget, overspending goes unnoticed.

Goal tracking: Are you on track for your profit target? The budget tells you.

Cash flow management: Understanding expected income and expenses helps you anticipate cash needs.

The Simple Approach

You don’t need sophisticated software or a finance degree. Here’s a simple approach that works:

Step 1: Gather Historical Data

If you’ve been in business, start with what you know:

Last year’s revenue by month
Last year’s expenses by category and month
Seasonal patterns in your business
Any one-time items to exclude

If you’re new, you’ll need to estimate. We’ll cover that separately.

Step 2: Project Revenue

For each month, estimate expected revenue:

Method 1: Percentage growth Take last year’s revenue and apply a growth (or decline) assumption.

Last year: $30,000/month
Expected growth: 10%
This year budget: $33,000/month

Method 2: Bottom-up calculation Build from units or customers:

Expected customers: 50
Average sale: $600
Monthly revenue: $30,000

Method 3: Pipeline-based For service businesses with longer sales cycles:

Signed contracts: $40,000
Probable deals: $20,000 × 50% = $10,000
Expected revenue: $50,000

Use the method that fits your business model.

Step 3: List Fixed Expenses

Fixed expenses stay relatively constant:

Rent/lease payments
Loan payments
Insurance premiums
Subscription software
Base salaries
Recurring professional services

These are predictable and easy to budget.

Step 4: Estimate Variable Expenses

Variable expenses change with activity:

Cost of goods sold
Commissions
Credit card fees
Shipping costs
Hourly wages
Marketing spend

Often these are expressed as percentages:

COGS: 35% of revenue
Commissions: 5% of revenue
Credit card fees: 2.5% of revenue

Step 5: Include Seasonal Variations

Don’t budget flat if your business isn’t:

Retail peaks in Q4
Tax services peak in Q1
Landscaping peaks in summer
Many B2B businesses are slow in August and December

Adjust monthly budgets to reflect your reality.

Step 6: Add Planned Investments

What do you plan to spend on that’s outside normal operations?

New equipment
Hiring additions
Marketing campaigns
Software implementations
Training and development

Include these in the months you expect to spend.

Step 7: Calculate Expected Profit

For each month: Revenue - All Expenses = Profit

If the number is negative (loss), you need to either increase revenue expectations or reduce planned expenses.

Sample Budget

Here’s a simplified monthly budget:

Category	January	February	March
Revenue
Service Revenue	$35,000	$38,000	$42,000
Total Revenue	$35,000	$38,000	$42,000

Cost of Goods Sold
Direct Labor	$10,500	$11,400	$12,600
Subcontractors	$3,500	$3,800	$4,200
Total COGS	$14,000	$15,200	$16,800

Gross Profit	$21,000	$22,800	$25,200

Operating Expenses
Salaries - Admin	$5,000	$5,000	$5,000
Rent	$2,000	$2,000	$2,000
Marketing	$1,500	$1,500	$2,000
Insurance	$400	$400	$400
Software	$300	$300	$300
Utilities	$200	$200	$200
Office Supplies	$150	$150	$150
Professional Services	$500	$500	$500
Other	$300	$300	$300
Total Operating	$10,350	$10,350	$10,850

Net Profit	$10,650	$12,450	$14,350

Key Features

Revenue increases month to month (seasonal expectation)
COGS is 40% of revenue (percentage-based)
Fixed expenses stay constant
Marketing increases in March (planned campaign)
Profit grows with revenue

Budgeting for New Businesses

No historical data? You’ll need to estimate differently:

Research Industry Benchmarks

What do similar businesses spend on rent?
What’s typical COGS for your industry?
What are common operating expense ratios?

Resources:

Industry associations
SBA resources
Accounting firms’ industry benchmarks
Business plan templates for your sector

Build from First Principles

List everything you’ll need:

What software subscriptions?
What insurance coverage?
What will you pay yourself?
What marketing will you do?

Price each item specifically.

Be Conservative

When estimating:

Revenue: Be pessimistic
Expenses: Be generous
Timeline: Expect things to take longer

It’s better to beat a conservative budget than miss an optimistic one.

Plan for Ramp-Up

New businesses rarely hit stride immediately:

Month 1-3: Minimal revenue, full expenses
Month 4-6: Growing revenue
Month 7+: Approaching steady state

Budget for the ramp-up period explicitly.

Using Budget vs. Actual

Creating a budget is step one. Using it is where value comes:

Monthly Comparison

Each month, compare actual to budget:

Category	Budget	Actual	Variance
Revenue	$35,000	$32,000	($3,000)
COGS	$14,000	$14,500	($500)
Operating	$10,350	$11,200	($850)
Net Profit	$10,650	$6,300	($4,350)

Variance Analysis

For significant variances, ask:

Revenue shortfall: Why?

Lost a customer?
Delayed project?
Pricing pressure?
Market conditions?

Expense overrun: Why?

Unplanned cost?
Price increase?
One-time item?
Budget was unrealistic?

Understanding the cause enables action.

Action Options

When you find variances:

If revenue is low:

Increase sales activity
Adjust future expectations
Cut discretionary expenses

If expenses are high:

Cut if possible
Adjust future budget if permanent
Offset with revenue growth

Rolling Forecast Updates

As the year progresses, update your forecast:

Replace budget with actual for completed months
Revise remaining months based on new information
Keep a current view of expected year-end results

Budget Timeframes

Annual Budget

The foundation. Created before the year starts:

Full 12-month view
Quarterly detail at minimum
Monthly detail is better
Reviewed and revised quarterly

Monthly Budget

Derived from annual budget:

More detail for the immediate month
Updated with current information
Used for operational decisions

Project Budgets

For specific initiatives:

New product launch
Marketing campaign
Hire and onboarding
Equipment purchase

Separate from operating budget but integrated.

Common Budgeting Mistakes

Mistake 1: Not Having One

The biggest mistake is skipping the budget entirely. Even a rough budget is better than none.

Mistake 2: Set and Forget

A budget sitting in a drawer helps nothing. Review monthly at minimum.

Mistake 3: Too Much Detail

Every line item in your chart of accounts doesn’t need a separate budget. Focus on material categories.

Mistake 4: Unrealistic Optimism

Hoping for 50% revenue growth when you’ve historically grown 10% isn’t planning—it’s wishful thinking.

Mistake 5: Ignoring Seasonality

A flat budget when your business is seasonal creates confusion. Match the budget to your reality.

Mistake 6: Not Updating

When reality diverges significantly from budget, update the forecast. Stale budgets lose relevance.

Making Budgeting Easier

Use Technology

Spreadsheets work but accounting software helps:

QuickBooks budgeting features
Xero budgets and tracking
Dedicated tools like Float, PlanGuru

Start Simple

Begin with:

Total revenue target
Major expense categories
Expected profit

Add detail as you get comfortable.

Build on Last Year

If last year’s books are accurate, they’re your best starting point. Adjust from there rather than building from scratch.

Make It a Habit

Block time monthly for budget review. It only takes 30-60 minutes when you do it regularly.

Your Next Steps

If You Don’t Have a Budget

Pull last year’s P&L by month
Estimate this year’s revenue change
List your fixed expenses
Estimate variable expenses as percentages
Create a simple 12-month budget

If You Have a Budget

Run actual vs. budget for last month
Identify the 3 largest variances
Understand why each occurred
Decide on any actions needed
Update forecast if necessary

Make It Useful

A budget is a tool for running your business better. Use it for:

“Can I afford this?” decisions
Hiring and investment timing
Identifying problems early
Measuring progress toward goals

Want help building a budget or understanding your numbers? At Profit Path Books, we help small business owners create practical budgets and track their performance against plan. Book a consultation to discuss your financial planning needs.