A Comprehensive Guide to Creating a Business Budget

Published in

Triift Africa

6 min readJan 2, 2024

The heartache a simple budget will save your business is worth so much that you shouldn’t ignore it.

First, it helps you set the right price since you have a clear estimate of the amount required to run your business. Beyond that, you're also able to accurately account for all the money in your business, without being confused about where the money went at the end of each business month; alongside many other benefits to be examined in detail below.

By the end of this article, we would have explored what a business budget is, why you need it, the core elements to include in a business budget, and a step-by-step process for creating one. Let’s start with the basics.

What is a Business Budget?

A business budget is a plan that states how much a business makes (income) and spends (expenses) over a period, which then allocates a specific amount of the income to various expense categories, for efficient financial management.

A budget helps you lay the foundation to plan for your business finances for a period. This can be done by examining all income streams to know how much you will be getting in a specific month, and how much you need to spend and save.

Your budget can either be for a full year or created monthly, to be up to date with changing financial realities.

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Why do I need a business budget?

Business budgeting is as important as any activity you will carry out to enhance your business finances. Here are some reasons to start creating a business budget today:

1. Aids the setting and achieving of business financial goals

Just like you set sales goals, you should also set financial goals for your business; and no, they are not the same. Your sales goal is based on selling a specific number of products/services. While your financial goal can be to generate more revenue streams in your business, leading to making more money.

With a budget, you can plan how to do this by estimating how much to set aside to generate more money in your business, leading to hitting your business' financial goals.

2. Helps in being prepared for unplanned expenses

With a business budget, you are never caught off guard by unexpected business expenses, such as repair for equipment that unexpectedly stops working, an increase in rent, etc.

This is because your budget should help you set aside money for emergencies and other unexpected expenses.

3. Makes debt repayment easier

Your budget should also contain a debt repayment category, whereby you allocate a specific amount of money periodically to service any debt you may have. This ensures that you are not choked with excessive debt repayment at a time and that you pay off your debt little by little, till it is done.

4. Helps you make rational financial decisions

Your business budget gives you a clear understanding of your business financial situation, based on how much you make, spend, use in paying off debt, use for salaries, and save. With this understanding, you are equipped to make smart financial decisions to increase your business revenue and grow faster.

5. Helps to curb overspending and stop money leakages

With a budget that allocates a specific amount to each expense category, you can track when you’ve spent all the money for a category, to stop spending more on that category.

Budgeting also helps you identify where money is leaking from in your business, be it a subscription you are paying for but not using, or equipment that is sucking money every month for repairs. You know where your money is going and can stop those leakages.

Must-read: 4 Financial Numbers every small business owner should analyze for growt

What to include in a business budget

Here are the core variables to include in your business budget.

1. Total Business Income

Since your budget is a plan that allocates the money you earn into various spending buckets, it is then expected that your total business income/revenue will be included in it.

2. Fixed Costs

Next are your business' fixed costs, such as payment for rent, taxes, and salaries that are constantly paid.

3. Variable Costs

Variable costs are also key to running a successful business; however, they change over a period. Examples are the costs of raw materials, which may change based on the market, the cost of packaging materials, and more.

You should read: Cash flow forecasting: A step-by-step guide

4. Unexpected Expenses

Never make the mistake of excluding an unexpected expense category when planning your business budget. This is what makes many business owners unable to track where their money is going since they don’t consider some unexpected expenses that may crop up in a business month.

Step-by-step process to create a business budget

Take the following steps when creating your business budget.

Step 1: Estimate total revenue by examining all sources of income

The first step is to get a total estimate of how much the business generates over a period. This is what enables you to plan your spending and savings accurately.

In calculating revenue, examine all sources of income to get an accurate estimation of how much you make. For an accurate analysis, you can check past revenue generated, to have an idea of what future revenue will look like. Also, never overestimate your revenue, as this is a budgeting mistake that can sabotage your finances.

2. Subtract fixed costs

Next, calculate your business's fixed costs from the revenue. Examples include payment for rent, salaries, taxes, and debt repayment.

This is key to ensuring the smooth running of your business, without any difficulties.

3. Subtract variable expenses

Variable expenses change over a period, and they must be included in your business budget. Examples include costs of production, such as raw materials, and product packaging.

4. Plan for unexpected expenses that may occur

Not planning for unexpected expenses in your business budget is the biggest mistake you can ever make. Without setting aside business money to cater for unplanned expenses, you will see yourself dipping into your savings or borrowing to cater for these expenses when they come up.

5. Add all projected revenue and expenses, then deduct total expenses from total revenue

After getting a total estimate of your business revenue and all expenses (fixed costs, variable expenses, and unplanned expenses), now, subtract the total expenses from the total revenue.

When your revenue is more than your expenses–that equals profit. But when expenses exceed revenue, that is a loss. So, if your monthly expenses are more than your monthly revenue, start thinking of ways to generate more income for your business, to move from loss to break-even to profits.

Create your Business Budget with Ease

Planning a periodic business budget is not only going to save you money, it will also help you manage your business money wisely.

To gain more in-depth insight on how to create a working budget for your business, our budgeting guide with a bonus budgeting template has been created to help you identify common budgeting mistakes you are making, how to budget in difficult financial times, how to create a budget to help you attract investment-yes, that’s a thing, and more. Get a copy here.

Ever created a budget for your business? Were you able to follow it through, and did it have any significant impact on your business during that period? Drop a comment and let us know.