A business budget is the difference between guessing at your cash flow and knowing it. These nine budgeting process steps walk you from last year's numbers to a plan you can actually hold your team to.
What is the budgeting process?
The budgeting process is the repeatable set of steps a business follows to plan how it will earn and spend money over a period, usually a fiscal year. It starts with reviewing past performance, forecasting revenue, and listing fixed and variable costs, then works toward a final budget you apply and review on a set schedule. For most small businesses it's an annual exercise revisited each quarter, not a one-time task.
What is a business budget?
A business budget is a detailed plan that outlines your company's future spending based on business goals. Budgets track your cash and help business owners estimate exactly how much money is moving in and out of their business.
There are many different types of business budgets available, each with its own pros and cons, but each budget shares similar components.
Common components of a budget
Income (or revenue)
Revenue is the total amount of income generated by your business from the sales of goods or services before any expenses. If you add up the total sales generated by your company, that is your company's total revenue for the year.
Fixed costs
Fixed costs are recurring expenses that don't change from month to month, regardless of sales or production volume. Some common examples include rent or mortgage payments. Fixed costs are easiest to budget for because they're predictable and regular.
Variable costs
Variable costs are recurring expenses that change depending on sales volume of goods and services. Common examples include direct materials and labor, shipping costs, and sales commissions.
Variable costs are difficult to budget because they can fluctuate on a weekly or daily basis. As a small business owner, it's important to budget for variable costs with an annual buffer of 5% to 10% to cover any increases in the cost of materials, labor, or inflation.
Why do you need a business budget anyway?
Budgets are an essential planning tool for any organization to ensure that money is being spent and invested correctly. A well-planned budget will help you:
Forecast earnings and expenses. A budget sets targets for revenues and costs, which helps your team work to achieve them.
Anticipate business fluctuations and stay profitable. Your budget can help you identify where to decrease spending or whether you need to increase revenue, improving profitability in the process.
Grow your business and obtain a loan. When you can prove you have a handle on your cash flow, you increase your chances of winning over investors or obtaining a bank loan.
Achieve your financial goals. Your business budget is a financial road map—it evaluates the status of your finances and outlines what you need to do to hit your goals.
How to create a business budget: 9 key budgeting process steps
If you're in the process of budget planning, follow these 9 simple steps to create your business budget.
Step 1: Review your previous financial period
Step 2: Calculate your revenue
Step 5: Forecast extra spending
Step 8: Apply budget and stick to it
Step 9: Review and adjust for the future
Step 1: Review previous financial period
The first step in creating a well-planned budget is understanding your business finances.
If you already have an existing budget, a good starting point is to look at your previous budget and ask yourself these questions:
Did you spend more or less than anticipated?
Were your assumptions about the industry and your own business growth accurate?
Were there unexpected challenges you faced? What caused them?
Was the budget easy to enforce? Did your team members follow it?
The answers give you an idea of how accurate your previous budget was, and from there you can make adjustments for the next fiscal year.
If you don't already have a business budget, don't worry—you'll have a few more things to consider, but you can still create a forward-looking budget. Check your spending from the previous year to get an idea of what your business expenses are and work that into your budget.
Step 2: Calculate your revenue
To know how much money you have to budget, you first need to understand how much revenue your business makes—after all, you can't spend money you don't have.
Create a list of all your products or services and forecast how much you anticipate making in the next year. If your business has additional income streams, such as affiliate commission, include them in your total revenue number as well.
Step 3: Create a list of your fixed costs
Once you've calculated your revenue, the next step is to determine your expenses.
A good place to start is with fixed expenses, as they are necessary expenses that every business incurs and stay the same month over month. Fixed expenses are not impacted by sales, so whether you have a knock-out sales month or an unexpected dip, these expenses remain constant.
Fixed expenses differ for each business and industry, but often include:
Rent (if you have an office, studio, or warehouse space)
Utilities such as electricity and internet
Salaries for employees
Business loan payments
Taxes
Software that is essential for business operations
Assuming your company doesn't move offices or add staff, your fixed expenses should remain similar each month.
Step 4: Create a list of your variable costs
Variable expenses, as their name suggests, are not the same each month—they vary depending on business performance. Typically, the higher the sales volume, the higher the variable costs, as you'll need to produce more products or dedicate more resources to running a service.
Variable costs include:
Operating costs such as cost of goods sold, which depend on sales volume. If your business sells widgets and you sell more one month, the cost of producing them goes up.
Sales commission
Marketing expenses such as advertising or public relations
Corporate investments or donations
Team perks
Office snacks and coffee
Variable costs are often called discretionary expenses, but some may be necessary to run a business. What one business considers discretionary may not be the case for another. For most small businesses, things like team perks, corporate donations, and office snacks can be considered non-essential if the budget is tight.
Step 5: Forecast extra spending
Once you have an idea of both your fixed and variable costs, plan for unexpected expenses that may occur. Are you planning an office renovation? Hiring new employees who will need computers and desks? Anticipating any big company events?
Consider all these scenarios as you plan your budget. Set aside money for anticipated one-off expenses in the next year, plus additional money for a "rainy day fund" to create a safety net for your business.
Step 6: Analyze cash flow
Once you understand your revenue and expenses, your budgeting actually begins.
Cash flow refers to the relationship between money coming in and going out of your company. Understanding cash flow lets you predict whether you'll go over budget or if revenue dips. Identify particular areas or departments that may impact the budget most heavily, and be prepared to adjust accordingly.
Step 7: Determine your budget
Before you get started, determine which business budgeting model will work best for your business. Once you have all the numbers available, use business budgeting software to put your budget together. It can be as simple as an Excel spreadsheet, or a more sophisticated tool that automates the process.
Step 8: Apply your budget and stick to it
A critical step is to share the budget with your teams for transparency, so they can help ensure you stay on budget. You'll likely depend on your team to handle their own costs, and they need the tools and expectations to do it well.
Ensure everyone involved knows how much they're allowed to spend and can track and report that amount. Consider investing in employee expense management software to reduce the time and effort needed to keep budgets on track.
Step 9: Review and adjust for the future
Budgets are fluid and can change with new business goals or financial circumstances. Review your budget quarterly (or monthly) and adjust accordingly.
If your forecasted sales targets are off one month, you'll need to adjust your budget and find other areas to save. If you have a great sales month, you have more cash flowing in that can be invested elsewhere or moved to your business savings account.
How to stick to your budget with Relay
The hardest part of planning a budget is sticking to it. Budgeting doesn't happen overnight, and learning to stick to a budget takes practice. Relay is an online banking and money management platform that helps you stay on budget once you've figured out what it is.
Relay offers up to 20 checking accounts with no monthly maintenance fees, so you can compartmentalize your budget and categorize expenses by team or category. Get visibility into your cash flow with detailed transaction data, and automate your payments. If you're looking for an online banking solution with built-in budgeting features, open a Relay account—you can be set up in about 10 minutes.
Frequently asked questions
What are the steps in the budgeting process?
The budgeting process runs in nine steps: review your previous financial period, calculate your revenue, list your fixed costs, add up your variable costs, forecast extra spending, analyze cash flow, determine your budget, apply it and stick to it, then review and adjust for the future.
What is the budgeting process for a small business?
For a small business, the budgeting process is usually an annual plan revisited quarterly. You start from last year's actual numbers, forecast revenue, subtract fixed and variable costs, set aside a buffer for one-off and unexpected expenses, then apply the budget and review it on a schedule.
How often should you review your business budget?
Review your budget at least quarterly, and monthly if your revenue is seasonal or fluctuates. Frequent reviews let you catch a revenue dip or overspend early and shift money before it becomes a cash flow problem.
What's the difference between fixed and variable costs in a budget?
Fixed costs stay the same each month regardless of sales—rent, salaries, loan payments, software. Variable costs move with sales volume—cost of goods sold, shipping, sales commissions, marketing. Budget fixed costs first because they're predictable, then estimate variable costs with a 5–10% buffer.
