Financials and Cash Flow

Business budgeting: Four simple steps

Learn how to create – and stick to – a budget with these quick tips.

Published: August 09, 2016

Having a good grip on your finances, as well as a regular budgeting process, is essential to helping your business flourish. That's why it's smart to prioritize these tasks from the get-go.

Follow these four steps to create and follow through on a budget.

Step #1: Assemble your tools

First and foremost, determine which tools you want to use for your budgeting process. You can purchase a digital accounting package like QuickBooks or Xero, or you can rely on a good old-fashioned pencil and paper. If you opt for accounting software, consider what additional services you may want to use it for: Do you want to process payroll? Do you want to have the ability to prepare taxes? You can also visit the Wells Fargo Business Plan Center, which offers a budgeting tool to help you flesh out the financial component of your business plan.

Step #2: Prepare your budget documents

Get started by printing your income statements (also known as profit-and-loss or P&L statements) from the last two years. If you don't have them, find your income tax returns, which usually include income statements prepared by your CPA or tax accountant.

Step #3: Project sales and expenses

Use your past statements as a starting point to project future profits. Carefully review both sides of the profit coin: sales and expenses.

Sales: There are two ways to approach the sales line of your budget:

  1. Set a sales goal, and work from there.

  2. Fill in all your projected costs, and determine what sales number you will have to reach in order to cover costs and reach your desired profit.

Either way is OK. If you start with the sales goal, and later find yourself unable to cover all your expenses, you can shift your sales target accordingly. Remember, your budget is a projection. It's what you would like to achieve, but you may be able to adjust it.

Expenses: Be realistic when estimating your costs. You should account for everything: securing real estate, financing equipment, building your inventory, and paying for the smaller day-to-day items. Reference your income statement, tax returns and check register to see how much you have spent on expenses in the past.

Create a few versions of your budget. Have a plan in place for what you'll do with extra cash should you find yourself with a surplus at the end of the budget period, as well as a strategy for how you'll manage in case you experience lower sales.

You can project your budget one month at a time, or for a whole year. Then compare actual performance to budgeted numbers on a week-by-week basis.

Step #4: Track your progress

A well-crafted budget can be a powerful way to set – and reach – your goals. Each week, compare your actual financial performance to your objectives. Consider recruiting an employee or a business-minded friend to review with you: Two sets of eyes will catch more math errors, and two brains will help you think through your assumptions better than one.

If you discover an issue, you can determine what action to take to resolve it. Play offense, and consider what you can do to increase sales. Play defense, and manage expenses so you can make a profit with the sales you have, even if you don't hit the budgeted goals. By taking charge of your budget, you maintain control of your business's financial health – and its future.