John McCartney takes budgeting for this small business seriously. Every year he reviews previous year’s expenses for his business, Jmac PR, a tech PR agency that specializes in providing comprehensive PR services to companies in the technology industry, including digital agencies. He then uses that information as a benchmark to help him create a budget for the current year.

“I pride myself on being data-driven and intentional about curbing expenses to maintain the financial health and stability of the business,” says McCartney. 

The idea of creating a budget for your small business may seem daunting, especially if your business is a startup and you don’t know how much money your business will bring in or how much you’ll need to spend to generate revenue. But if you want to create a successful business, you aren’t likely to reach your goals if you don’t know what they are.

Here’s a checklist small business owners can use to create a business budget. 

What Is a Budget in Business?

Before we get to the checklist, let’s start with the basics. A budget in business serves as a financial blueprint. It details how much your business expects to bring in (revenues) and how much it expects to spend (expenses). 

While the actual numbers may vary, a budget is helpful so you can measure business performance, allocate resources effectively and make informed decisions.

“Creating a budget gives you control over the day to day fluctuations in your business cash flow,” says Kelsa Dickey, money coach and CEO of Fiscal Fitness. “Once you have control over that, you can be more proactive, less reactionary, and focused on more important things such as driving revenue, launching a new offer, taking time off and taking care of your clients and customers,” she observes. 

If you don’t plan, you’re probably just reacting. This is pretty common. Many small businesses adopt a reactionary approach when it comes to the budgeting process or financing their business. But this isn’t likely to support long-term growth. 

Statistics are telling: of the approximately 30 million small businesses in the United States, a fraction survives beyond the first few years, and only about 40% turn a profit.

How to Budget For a Small Business

You don’t need to wait until the first of the year to create a strategic 12-month budget: you can do it now. Plan for those times when you expect revenue to be tight and decide what you will do to compensate when cash is flush. Will you set aside a percentage of profits to tide you over or borrow to fill the gaps? 

Patrina Dixon, founder and CEO of It’$ My Money recommends keeping it simple. When asked for her best business budgeting tips she says: 

• Tip # 1 Just do it. 
• Tip  # 2  I prefer paper and pen or use a google doc. 
• Tip #3 –  Plan, Plan, Plan…looking ahead

Here are 5 steps to creating and implementing a strategic business budget: 

1. Identify and quantify your goal

What are your financial goals? Do you just want to break even? Make a specific profit margin? While you can’t predict the future exactly, you can create a plan. 

2. Project cash flow

What are your current and expected revenue streams/income sources? How long is it going to take to start earning revenue, how much can you reasonably predict you’ll earn in the coming months, and when will you hit the break-even point? Projected revenue can be hard to nail down, especially if you have a new business. Research your market, analyze the competition, and nail down your pricing.

Based on your research, estimate how many sales you predict to make in each of the coming months of your budgeting period. Then, multiply the number of sales by the price of your product or service to get a revenue figure. 

3. Determine essential expenses 

Budgeting for business expenses requires understanding and categorizing costs into fixed, variable, and semi-variable expenses. Here’s a breakdown:

Fixed Expenses: These are costs that do not fluctuate, such as rent payments and fixed employee salaries. For example, if you’re renting office space, you might pay a fixed rent of $3,310 per month for a 1,000-square-foot office based on an average rental cost of $3.31 per square foot.

Variable Expenses: These costs change based on activity, volume, or other factors. Examples of variable costs include packaging supplies, raw materials, and credit card fees. These expenses need to be estimated more carefully as they fluctuate with the volume of goods or services sold.

Semi-Variable Expenses: These have both fixed and variable components. An example is payroll for employees who are paid an hourly wage plus performance bonuses, making the total cost variable depending on hours worked and bonus payouts.

Below we list some common expenses. Once you’ve identified the expenses your business will have, you need to estimate how much each will cost. Research each expense to understand typical costs in your industry and location. 

A couple more tips:

Research thoroughly: For fixed expenses like office rent, for example, research the average costs in your area and compare these with actual listings to ensure your estimates are realistic. Tools like Live Plan can be helpful in setting a budget for your business. 

Build in extra: When estimating variable and semi-variable expenses, it’s safer to err on the side of caution and budget for higher than anticipated costs to avoid financial shortfalls.

4. Incorporate a reasonable cushion  

This could be for a cash reserve or unexpected expenses, or times of slower cash flow. Whether or not your strategy for the year includes borrowing, setting aside a percent of profits for a rainy day is just a good idea. There are a lot of unexpected business expenses that can easily be addressed if you have a little extra cash in the bank. If at all possible, set aside at least part of profits to ensure you have a business bank account with at least 3- to 6-months of operating expenses stashed away. 

Use the right tools

It’s a lot easier to budget and to track your business financing when you use the right tools. Keep your bookkeeping up to date, and use accounting software to help you instantly calculate key financial metrics like an accounts receivable aging report, cost of goods sold, and financial statements like an income statement or profit and loss statement. 

A business bank account is also very useful for tracking income and expenses. Keeping your financial data in one place can give you real-time insights into your business financial health. 

What to Budget For in a Small Business

While expenses can vary depending on your type of business (online, brick-and-mortar, or service-based), common costs include:

• Advertising and marketing expenses: Building a website, performing market research, establishing a presence on social media, launching online and offline marketing strategies, creating collateral, etc.
• Business establishment: Forming a company, registering it in your state, and getting a business license or permit.
• Equipment and supplies: Buying the equipment and supplies necessary to run the business (e.g. restaurants would need ovens, ranges, food processors, dishes, cutlery, etc.)
• Financial fees: Paying fees to banks and credit card processors for accounts and transactions.
• Insurance: Purchasing business insurance policies such as those for general liability, commercial property, and business income.
• Inventory: Investing in inventory upfront (for product-based companies).
• Labor: Hiring executives, employees, and/or contractors and paying their wages.
• Legal fees: Setting up legal agreements, contracts, and policies.
• Office space: Renting or buying office space for the business.
• Office supplies and furnishings: Buying desks, chairs, couches, tables, paper, pencils, and more for the office.
• Packaging and postage: Packaging and shipping for physical products.
• Technology: Buying accounting software, security tools, cloud services, apps, subscriptions, etc.
• Unexpected costs: Building an emergency fund so you have spending money available for unforeseen costs.
• Utilities: Paying electricity, water, phone, internet, etc.

While these are common costs, you may be wondering how to find the ones specific to your business. To start, take some time to think over what you’ll need to conduct business and make a list. 

Then, make sure you don’t miss anything by asking other business owners with similar business types or researching the expenses for your specific business online.

Don’t forget about one-time expenses or those that may occur once a year, such as the fee for a business license or a fictitious name fee that may renew every few years. 

There will be a learning curve and you may find you need to recategorize certain expenses. 

“One category that owners often confuse is travel, business development, and meals,” warns McCartney. “I recently had to review our expenses and categorize them accurately. Meals enjoyed locally can’t be equated to those incurred during work-related travel or business development activities, such as attending trade shows or pursuing new business opportunities.”

What Do Successful Small Businesses Budget For That Unsuccessful Ones Don’t?

“The best small business budgets forecast into the future,” Dickey says. “Most of my clients have a weekly budget that looks forward week-by-week. Oftentimes we can plan expenses easily and then estimate revenue. That way we can always see what cash flow will look like now, but also a few weeks from now.” 

“Too many budgets simply track PAST spending and that provides very limited benefit,” she warns. Planning helps entrepreneurs ‘ride the cash flow wave’ and not feel a feast or famine situation, which can wreak havoc to a small business. It prevents you from making decisions one way when money is flush and a different way when money is tight,” she advises. 

Overlooked expenses

One common overlooked budget item is “a PTO fund,” says Dickey. And she’s specifically talking to business owners who may not build in a cushion so they can get a break.

“Taking time off is not only necessary for your overall well being as an entrepreneur, but it can also spark creativity and motivation and be a driver of future success.” She recommends opening a a savings account and depositing into it every month. “When you take time off, if you notice a dip in sales or revenue, simply pay yourself money from your newly established PTO fund,” she recommends. 

Two of the biggest budget items entrepreneurs overlook are “cash reserves and legal expenses,” says Joe Harper, executive director Texas State SBDC. “No business can survive very long without cash, so focus on maintaining excess cash over the float margin, and grow it as the business grows. Remember you are not just covering swings in cash flow, or additional growth (in expenses), but those things not yet seen.”

He also encourages business owners to budget legal expenses. “Business(es) create contracts both expressed and implied on a daily basis, creating exposure to liability.  Every decision has legal ramifications that should be explored, and every negotiation should have a legal review process,” he warns. “Whether you are engaging an attorney to set up a review process, or negotiate a contract, you should prepare for that expense.”

Dixon encourages business owners to create a marketing budget. When she started out, she didn’t budget for marketing, she says. “(I) just paid for it when I could. I now think, based on the type of business you have, marketing should be an expense line in your budget.” 

How Much Should a Small Business Budget for Marketing

Marketing budgets, on average, constitute 11.8% of the overall budget and 10.4% of a company’s revenue, according to the CMO Survey Highlights and Insights Report from February 2022. These figures indicate a return to pre-pandemic levels, showing a resilient recovery in marketing spending.

How much you’ll need to spend will depend on your industry, marketing objective and the types of marketing that work for your business. 

That same survey found that consumer packaged goods companies, for example, spent  24.4% of their overall budget on marketing, while healthcare businesses spent only 4.5% of their budget on marketing. 

How Much Should a Small Business Budget for Financing

Budgeting and financing go hand in hand. If your business has debt, you’ll need to make sure you budget for payments, and maintain enough room in your budget to make sure you can continue to make those payments until your loan is paid off.

How To Incorporate Building Credit in a Business Budget

Incorporate building credit into your business budget can give you a long-term advantage. Building strong business credit can help you qualify for better small business loans and financing options, better terms with suppliers (such as net-30 accounts), and lower insurance rates. It can even help your business land lucrative contracts or partnerships. 

Like personal credit scores, business credit scores are designed to assess risk. 

However, instead of evaluating an individual, they evaluate businesses. Business credit bureaus including Equifax, Experian, and Dun & Bradstreet collect payment history from lenders, suppliers, and vendors to create credit scores. These scores also take into account information such as time in business, bankruptcy filings, UCC filings, and other liens. 

You can build, monitor and manage your business credit for less than you pay monthly for most cell phone plans. Think of it as investment in your business future. Here’s a guide that will explain how to establish business credit.

A Simple Small Business Budget Checklist

Use this as a starting point to create a budget that works for your business.

Financial Goals

What are your financial goals? (e.g., break-even point, specific profit margin)

Revenue Projections

What are your current and expected revenue streams?

How many sales do you anticipate each month?

What is the price of your products or services?

Calculate projected revenue: Multiply the estimated number of sales by the price.

Expense Estimation

Business formation costs

Business licenses/business registration costs

Rent and/or warehouse costs

Utilities

Payroll: Salaries, hourly pay, contractors, and/or bonuses

Employee benefits

Software

Insurance

Other fixed expenses

Legal costs

Advertising/marketing

Inventory

Supplies

Raw materials

Packaging

Shipping supplies

Shipping costs

Financial Cushion

How much will you set aside for emergencies, slow periods, and time off?

What is your target amount for your emergency fund? (Aim for at least 3-6 months of operating expenses.)

Tools and Resources

What accounting software will you use?

Do you have a dedicated business bank account and business credit card for tracking income and expenses?

Do you have a team who can help you make sure your budget works? These can include your accounting professional, a CFO or money coach.

Frequently Asked Questions About Startup Business Budgets

Still have questions? Here’s a look at answers to some of the most frequently asked questions about startup business budgets.

How much does it cost to run a business in the first year?

Costs can vary greatly from one business to the next. However, Shopify reports that the average business spends about $40,000 in the first year on expenses.

Can I write off startup expenses?

Startup costs that you incur before the business begins operations are typically considered capital expenditures. They are part of your basis in the business. However, you can deduct up to $5,000 of qualified start-up costs and $5,000 of organizational costs, as per the IRS. Be sure to review those rules or talk with a tax professional. 

What business can you start for $5,000 or less?

There are a variety of businesses that you can start with a very low amount of capital, primarily online service-based businesses. For example, starting a business as a virtual assistant, transcriptionist, freelance writer, freelance designer, consultant, or coach can all involve very little overhead. Offline service-based businesses such as dog walking, pet sitting, house sitting, and event planning can also be low-cost options.