Small Business Budget: How to Create One (Template Included)

Quick answer: A small business budget is a month-by-month plan of expected revenue, costs and profit for the year ahead. To create one, start from last year's actual figures, forecast sales conservatively, list fixed and variable costs, include owner pay, taxes and a reserve, then compare actual results with the budget every month.

A budget turns vague goals ("grow this year", "cut costs") into numbers you can check. It tells you how much you can spend on marketing, whether you can afford a hire, and when cash will be tight. Without one, decisions are made on the bank balance, which reflects the past rather than the plan. This guide walks you through seven steps, gives you a template layout to copy into a spreadsheet, and works through a complete example with the arithmetic shown.

A note on tools: the free invoice generator on this site creates PDF invoices in your browser. It does not do budgeting or bookkeeping, so build your budget in a spreadsheet or your accounting software. Your invoice history, however, is one of the best sources for forecasting revenue.

Why every small business needs a budget

• Spending decisions: you know in advance what you can afford each month.
• Pricing: a budget shows the revenue needed to cover costs and owner pay.
• Early warning: monthly budget-vs-actual comparisons reveal problems while they are small.
• Financing: lenders and investors commonly expect financial projections. The SBA's guide to managing business finances covers budgeting as part of sound financial management.
• Tax planning: setting aside tax monthly avoids a painful bill at year end.

How to create a small business budget in 7 steps

Step 1: Gather last year's actual numbers

Pull your profit and loss statement for the last 12 months, by month if possible. If you are new, use your business plan estimates and research from suppliers, landlords and insurers. Actual figures are the foundation; budgets built on guesses tend to be optimistic.

Step 2: Forecast revenue month by month

Start with recurring income you are confident about, such as retainers and subscription customers. Add expected project or product sales based on past months, adjusting for seasonality, price changes and known contracts. Be conservative: it is easier to manage a pleasant surprise than a shortfall. Your past invoices show which months are busy and which are quiet.

Step 3: Estimate cost of goods sold

If you sell products, estimate COGS as a percentage of forecast sales based on history. If your cost of goods sold has been 40% of revenue, budget 40% unless supplier prices are changing.

Step 4: List fixed costs

Rent, salaries, insurance, software subscriptions, loan payments, phone and internet, accounting fees. These are predictable; check contracts for scheduled increases.

Step 5: List variable and one-off costs

Variable costs move with sales: payment processing fees, shipping, commissions, contractor hours. One-off costs include equipment, a website rebuild, trade shows and annual renewals. Put annual costs in the month they are paid, and also note them in a sinking fund line if you want to save for them monthly.

Step 6: Add owner pay, tax and reserves

Include what you plan to pay yourself, a monthly tax set-aside and a contribution to an emergency reserve. US sole proprietors who expect to owe tax generally make estimated payments during the year; see quarterly estimated taxes for freelancers.

Step 7: Calculate profit and review the plan

Subtract total costs from revenue for each month. If the year shows a loss, or months with large deficits, adjust now: raise prices, cut costs, delay purchases or plan financing. Check whether the revenue target is above your break-even point by a comfortable margin.

Budgeting methods to choose from

There is more than one way to build a small business budget. Pick the method that fits how stable your business is and how much time you have.

Method	How it works	Best for
Incremental	Take last year's actuals and adjust each line up or down	Stable businesses with reliable history
Zero-based	Start every line at zero and justify each cost from scratch	Cutting costs or resetting after a bad year
Percentage of revenue	Set each cost category as a share of sales	Businesses whose costs scale with sales
Allocation of receipts	Split every payment received into accounts for tax, owner pay and operating costs	Freelancers and owners with irregular income
Rolling	Always budget 12 months ahead, adding a new month as each one ends	Fast-changing or seasonal businesses

Many owners combine them: an incremental budget for fixed costs, a percentage-of-revenue rule for marketing, and a rolling update each quarter. A zero-based review once a year is a good way to catch subscriptions and contracts that no longer earn their keep.

Small business budget template

Copy this into a spreadsheet with 12 monthly columns plus a total column. The example below shows one month for clarity.

Category	Line item	Budget	Actual	Variance
Revenue	Product or service sales
Revenue	Recurring or retainer income
Direct costs	Cost of goods sold / subcontractors
Fixed costs	Rent, salaries, insurance, software, utilities
Variable costs	Payment fees, shipping, commissions, marketing
One-off costs	Equipment, renewals, events
Owner	Owner pay or draws
Set-asides	Tax reserve, emergency reserve
Result	Surplus or shortfall

Variance = Actual − Budget for revenue lines, and Budget − Actual for cost lines, so a positive number is always good news. Add a variance percentage column (variance ÷ budget) to spot the lines that are furthest off.

Worked example: a monthly budget for a small design studio

An illustrative two-person design studio prepares its budget for March. All numbers are invented for the example.

Line item	Budget	Actual	Variance
Retainer clients (4 × $1,500)	$6,000	$6,000	$0
Project work	$9,000	$7,500	−$1,500
Total revenue	$15,000	$13,500	−$1,500
Freelance illustrators	$2,000	$1,800	+$200
Salaries and payroll taxes (employee)	$4,200	$4,200	$0
Studio rent	$1,500	$1,500	$0
Software and subscriptions	$400	$460	−$60
Marketing	$600	$900	−$300
Insurance, phone, accounting	$500	$500	$0
Payment fees (about 2% of revenue)	$300	$270	+$30
Total business costs	$9,500	$9,630	−$130
Profit before owner pay and tax	$5,500	$3,870	−$1,630
Owner draw	$3,500	$3,500	$0
Tax set-aside (25% of profit, illustrative)	$1,375	$968	+$407
Left for reserve	$625	−$598	−$1,223

The arithmetic:

• Budgeted costs: $2,000 + $4,200 + $1,500 + $400 + $600 + $500 + $300 = $9,500. Actual costs: $1,800 + $4,200 + $1,500 + $460 + $900 + $500 + $270 = $9,630.
• Budgeted profit: $15,000 − $9,500 = $5,500. Actual: $13,500 − $9,630 = $3,870.
• Tax set-aside: 25% × $5,500 = $1,375 budgeted; 25% × $3,870 = $967.50, rounded to $968 actual.
• Left for reserve: $5,500 − $3,500 − $1,375 = $625 budgeted; $3,870 − $3,500 − $968 = −$598 actual.

What the owners learn: the shortfall comes almost entirely from project revenue ($1,500 below plan) plus extra marketing ($300 over). The month still made a profit, but after the owner draw and tax set-aside it dipped into reserves. The fix might be invoicing the delayed project promptly, trimming marketing next month, or reducing the draw temporarily. The 25% tax rate here is only a placeholder; your actual set-aside depends on your tax situation.

Budget vs cash flow forecast

Your budget says the studio earned $13,500 in March. But if $5,000 of those invoices are on 30-day terms, the cash arrives in April. A 13-week cash flow forecast converts the budget into timing so you can see when the bank balance will actually run low. Getting paid faster narrows the gap between the two; our guide on how to get paid faster covers deposits, shorter terms and reminders.

	Budget	Cash flow forecast
Purpose	Plan income, costs and profit	Predict when cash moves
Typical period	12 months, by month	13 weeks, by week, or 12 months
Revenue timing	When earned or invoiced	When the customer pays
Includes loan principal?	Often as a separate line	Yes
Main question	Will we make enough profit?	Will we have enough cash each week?

Common budgeting mistakes

• Overestimating revenue. Budgets based on the best month of last year usually disappoint. Use averages and known contracts.
• Forgetting annual and irregular costs. Insurance renewals, licenses, equipment and annual software plans catch owners out.
• Leaving out owner pay. The business must support you, or the budget is incomplete.
• No tax set-aside. Tax due at year end or in quarterly installments is a predictable cost; budget for it monthly.
• Making it once and filing it away. A budget only works if you compare it with actual results every month.
• Ignoring payment timing. A profitable budget can still run out of cash if customers pay slowly.
• Too much detail. Thirty expense lines are harder to track than ten well-chosen categories.

Small business budget checklist

• Last 12 months of actual income and expenses gathered.
• Revenue forecast by month, with recurring income separated from new sales.
• COGS or direct costs estimated from historical percentages.
• All fixed costs listed from contracts, with known increases.
• Variable, annual and one-off costs placed in the right months.
• Owner pay, tax set-aside and reserve contributions included.
• Monthly profit calculated; loss months addressed before the year starts.
• Budget-vs-actual review scheduled at each month-end close.
• Quarterly reforecast date in the calendar.

Tracking actual spending against the budget

The budget is only half the system. To fill in the actual column, every expense needs to be recorded and categorized the same way as the budget lines. Our guide on how to track business expenses sets up a simple routine, and an invoice tracker spreadsheet keeps the revenue side organized. Reviewing both monthly takes less than an hour once the habit is in place.

Next step

Open a spreadsheet, copy the template above, and fill in last year's actuals for each month. Then add your forecast for next year line by line. Make sure every completed job turns into an invoice the same week, so the revenue you budgeted actually reaches your books. For more on planning and cash, read our cash flow management guide.