Editorial · January 22, 2022
Small Business Budget: How to Build a Simple Annual Plan
A small business budget is a yearly plan that shows how much money you expect to earn, what you must spend, and how much cash you keep in reserve. You do not need special software to make one. A pen, a spreadsheet and last year's bank statements are enough. The steps below take about one afternoon.
Why a small business budget matters
Cash is what lets you pay staff, buy stock and keep the doors open. Weak cash planning can hurt your daily operations. It can also make a bank or lender less willing to help you.
A budget gives you a map. You see a cash shortage months ahead, when you can still fix it. You do not find out on the day the rent is due.
Think of cash flow as money moving in and out of the business. Money in comes from sales, loans, lines of credit and asset sales. Money out goes to bills, loan payments and purchases. The goal is to keep these two sides in balance, with a sensible cushion left over.
Step 1: Look back before you look ahead
Start with what really happened. Pull your income statement for the last year if you have one. An income statement lists your income and expenses over a period of time. If you are new, use your bank and card records for the months you have.
The IRS makes the same point about records. It says good records show whether the business is improving, which items sell, and what you need to change. Sorting last year into a few plain groups makes the next steps easy. Use groups such as sales, materials, wages, rent, software, insurance, loan payments and taxes.
Step 2: Estimate your sales, and be modest
Sales are the hardest number to guess. Do not pick a hopeful figure and hope it comes true. Take last year's monthly sales and look for patterns. A shop may sell more in winter. A landscaper may sell more in summer.
Then write three numbers for each month: a low case, a likely case and a high case. Build your plan on the low case. If sales come in better, you have extra cash. If they come in worse, you already planned for it.
For a new business with no history, talk to other owners in your trade. Ask what a typical first year looks like. If projections feel confusing, ask an accountant to look them over.
Step 3: List your fixed costs first
Fixed costs are the bills that arrive whether you sell anything or not. Rent, insurance, loan payments, software plans and salaries are common examples. Write each one down by month. Add them up.
This total is your floor. It is the amount of sales you need just to stay open. Once you see it, you can set a clear minimum sales goal. Many owners find the number is higher than they thought.
Next, list variable costs. These rise and fall with your sales, such as materials, shipping and card fees. A simple way to plan them is as a share of sales. If materials were 30 percent of sales last year, plan on 30 percent again unless a supplier has told you something new.
Step 4: Set aside money for taxes
Taxes are an expense too, and they often arrive in a lump. The IRS explains that sole proprietors, partners and S corporation shareholders generally make regular payments of estimated tax during the year. You generally need to do this if you expect to owe $1,000 or more when you file your return. Self-employment tax is part of what these payments cover.
Put a line for taxes in your plan and move that money aside each month. A separate savings account for taxes keeps it from being spent by accident. Ask a tax professional what share fits your business type, since the right figure depends on your structure and profit.
Start-up owners should also note that costs paid before you open, such as advertising, travel, surveys and training, are tracked as start-up costs. Keep receipts for them from day one.
Step 5: Build your cash buffer
A cash buffer is money you keep untouched so a slow month does not become a crisis. A common goal is enough to cover a few months of fixed costs. The right size for you depends on how steady your sales are. A business with big seasonal swings needs more.
If you cannot save that much yet, start small. Add a line to the budget called "buffer" and pay it first each month, even if it is only a little. Treat it like rent. Over a year, small amounts add up.
Aim for a reasonable amount of cash on hand at all times, not just when things go well.
Step 6: Check it every month
A budget only works if you compare it to real results. Once a month, put your actual sales and costs next to the plan. Note where you were off and why. Then adjust the next months.
A profit and loss statement is not the same as a cash flow view. A business can show a profit on paper and still run short of cash, for example when customers pay late or when you buy equipment. Track both views.
Keep the plan simple enough that you will actually use it. One page with twelve columns, one for each month, is plenty. If you feel stuck, an accountant can look it over with you.