Creating & Managing a Small Business Budget

Susan GuilloryUpdated December 15, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

One of the most important tasks of running a small business is being mindful about how you’re spending the money that you make. To do so, having a small business budget is crucial. By monitoring your income and your expenses and setting parameters for what you spend, you may be able to ensure that you’ll have enough money to grow your business.Knowing how to create a budget for your small business can help you at every stage in its development, whether you’re exploring the cost to start a business, looking to trim expenses during a slow period, or considering ways to expand your company.

What Is a Business Budget, and Why Do You Need One?

A business budget accounts for all the income and expenses your business expects to have over a month, quarter, or year. It may not be precise, since your revenues may fluctuate from month to month. Also, some of your costs will be fixed, like rent or internet services, while others will be variable, like office supplies and sales tax.Having a business budget can help ensure that you don’t spend more than your business brings in, and it can be helpful if you want to build a financial safety net in case of emergency. Additionally, if you are looking for investor funding, potential investors may be interested in seeing your budget as well as other financial statements from your business. Recommended: How to Run a Successful Small Business: 9 Helpful Tips

How to Create a Small Business Budget

Small business budgeting isn’t particularly difficult, but if you haven’t created a budget before, you might need a little guidance. As an example, let’s imagine you’re running a small children’s bookstore.

1. List Your Revenue and Expenses

Your business budget starts with figuring out what you’re bringing in and what you’re spending.

Estimate Revenue

Start by looking at your monthly revenues. If these fluctuate, you can take an average, though you may be better off budgeting on the lower end of that range. That way, you’re building your small business budgeting around a revenue number you feel secure that you can hit. You may bring in more some months, and that can go toward your savings.Let’s say your bookstore’s revenues range from $15,000 to $25,000 a month. In this example, we could average your monthly revenues, but let’s be conservative and use $15,000 as your monthly revenue. That way, your spending budget should never exceed what you bring in.

List Your Fixed Costs

Now let’s move on to your business expenses. You likely have two kinds of business expenses: fixed and variable. Start by going through your bank statements to identify fixed costs. These are expenses that recur at predictable or set amounts. They might include:

Commercial mortgage or rent payments
Internet and phone services
Software subscriptions
Insurance
Salaries

These will need to be included as-is in your budget.In the bookstore example, your fixed costs might include monthly payments for rent, internet and phone service, employee wages, and yearly payments for insurance and software subscriptions.

Estimate Your Variable Costs

Next, let’s consider variable costs, which can be different amounts from month to month. These may include expenses like:

Raw materials
Inventory
Utilities
Sales commissions
One-off expenses like a new computer

For your bookstore, that might include your book purchases, electricity bills, and heat and air-conditioning costs, for instance. Because you won’t know exactly how much these variable costs will be each month, set a budget for each that's on the high end of what you expect. In the bookstore example, if your utilities range from $175 to $300, budget for $300.Once you’ve listed your revenues and both fixed and variable expenses, you have the makings of a business budget.

2. Identify Goals to Save for

Compare your revenues against your total expenses (fixed and variable) for a specific period of time (like a quarter or a year). This can give you a sense of how much money you have left over to play with. You’ll use this “extra” money for this tip and the next.In addition to the expenses you’ve already listed, you may have goals you want to save for, too, like a down payment on a larger office space or a new, costly piece of equipment. For your children’s bookstore, perhaps you’d like to add another employee so you can expand your hours or build out an under-utilized space to start selling games, as well. These goals should also go into your budget.

3. Plan for an Emergency Fund

You should also budget for an emergency fund. Even putting aside a few hundred dollars a month can help you build up a cushion you may need down the road. If, for example, your computer’s hard drive crashes and you need a quick replacement, that money could come in handy. Or if that imaginary bookstore experiences an unexpected slump during the summer, having a reserve can help you pull through without going into debt. Some experts recommend maintaining a fund of somewhere between three and six months’ worth of expenses, but different businesses may find that different amounts work for them.Now that you know how much “extra” money you have after budgeting for all your expenses, you can decide how to allocate it among your goals and emergency fund. You may also want to open a business savings account so you can earn interest as you save.

4. Find Ways to Save

Spending less is usually a great business strategy. Look for sensible ways to reduce your expenses, such as:

Negotiating a better price with your vendors
Shopping for better pricing with new vendors
Cutting out unnecessary subscriptions
Shifting some staff to remote work and reducing office space
Investing in energy-efficient appliances

Perhaps your bookstore can find a wholesaler that charges you less for your stock. Or you might be able to save money by getting your phone and internet service from the same provider.Whatever steps you take, once you find ways to save, you can re-allocate those savings elsewhere within your budget.

5. Get Clients to Pay Faster

To be effective, your budget relies upon money you’re owed actually coming in. Keep cash flowing in by creating a payment policy. This will outline when you expect payments to be made on invoices, and whether there are any late fees clients will have to pay if they don’t hit that deadline. This can be a great way to motivate slow-paying clients. Another option is to offer a discount if clients pay their invoices early.If that imaginary bookstore is providing bulk orders to, say, a kindergarten, having a policy like this in place can help make sure you’ll get the money due to you and have a better sense of when to expect it.

6. Get Your Business Accounting on Track

Not everyone feels comfortable with budgeting, but there are numerous ways to keep it easy and effective. Consider some of these ideas to make sure that staying on top of your small business finances isn't a chore or a challenge.

Use Business Budgeting Software

Gone are the days of managing your business budget in an actual paper ledger or even in a spreadsheet. There are great small business budgeting software programs and budget calculators that can track your expenses and help you keep an eye on where you’re spending money. Most will connect with your business bank account to download transactions and categorize them automatically.

Educate Yourself on Accounting

Terms like financial ratios or balance sheets might give you a headache, but as a business owner, it’s in your best interest to have at least a rudimentary understanding of accounting. Knowing where your money is going, and having a strategy about where you’ll spend it in the future are a good start.

Hire Help if You Need It

While, yes, you need to understand your small business accounting, that doesn’t mean you have to struggle with managing it if you don’t have the time or energy. You can hire an accountant or bookkeeper, either full-time or on an as-needed basis, to manage your accounts, pay invoices, and file your taxes.It may be well worth the expense to have a professional handling your finances if you’re not comfortable doing it yourself.

6. Be Smart About Financing

Having a business budget doesn’t mean you always need to pay cash for expenses, but you do need to be smart about any financing you consider. You may want to explore startup funding options if you’re just starting out, or loans for small businesses if you’re ready to expand.You may also want to consider a business credit card with rewards. That allows you to earn points you can redeem for cash back, travel, and other perks when you use the card for business expenses. As an owner of an imaginary bookstore, you might be able to use those miles to fly to trade shows or book festivals around the country, for example.But before you apply for financing, have a plan (and yes, a budget) for how you’re going to spend the money. Your investment should net you more revenue or the ability to serve more customers. If it won’t, it may not be worth the expense of paying the interest on the loan. When it comes to using a business credit card, it may be prudent to only charge what you can afford to pay back quickly so that you can keep interest expenses to a minimum.Before your business takes on any kind of financing, consider shopping around to see what sort of credit terms you qualify for. The better your personal and business credit scores, the lower the interest rates you will probably be able to get. If your credit is less than stellar, you may pay quite a high rate for financing.

The Takeaway

Having a small business budget allows you to think long-term about how you want to grow your business. By keeping a keen eye on where you’re spending money (and working to reduce unnecessary costs), you can gain the ability to save for those goals that will take your company to the next level.If your business’s next level is going to require financing, Lantern by SoFi can help. Simply fill out one form to receive a business loan offer from one of our top lenders, all with no obligation to you. This can save you time and stress as you search for the best option for your small business.

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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