Many small businesses either have no budget or have one that was made once and never opened again. A useful budget is short, built from your own history and compared with actual results every month. The SBA's guidance on managing your finances makes the same point: planning only works when it is revisited.

Start from last year's actuals

Begin with a reliable profit and loss for the last 12 months; if the books are not reconciled, fix that first with catch-up bookkeeping. Last year's actuals by month show seasonality and the true level of each cost.

Build revenue from drivers

Instead of adding a percentage to last year's sales, build revenue from what drives it:

  • Service businesses: billable staff × hours × rate × utilization
  • Retail and ecommerce: traffic or orders × average order value
  • Subscription or membership: members × price, adjusted for churn
  • Contractors: expected jobs × average contract value and timing

Driver-based budgets make it obvious which assumption is wrong when results differ.

Separate fixed and variable costs

  • Variable costs move with sales: materials, merchant fees, commissions, shipping. Budget them as a percentage of revenue based on history
  • Fixed costs stay roughly level: rent, salaries, insurance, software. Budget them by month, including known changes such as a lease increase

Include the non-profit-and-loss items

A profit and loss budget does not show loan principal, equipment purchases, owner draws or tax payments. Add a short cash section for these, or build a cash forecast alongside; see cash flow basics.

Monthly comparison

Each month, compare actual results with the budget line by line and ask why the biggest differences happened. Timing differences, such as a bill paid early, need no action. Real changes, such as a supplier price increase, may need a response.

Reforecast, do not rewrite

When the year changes substantially, keep the original budget for comparison and add a forecast for the rest of the year. Rewriting the budget hides what you learned.

Keep it short

A budget of 20 to 40 lines is enough for most small businesses. Use the same categories as your chart of accounts so actuals can be compared directly.

How we help

Our accounting services include building the budget from your books and a monthly budget-versus-actual report with commentary.

Comparing budget to actual

A budget is only useful if you compare it with results. Each month:

  1. Run a profit and loss statement and place it next to the budget
  2. Calculate the variance for each line, in dollars and percent
  3. Focus on the few lines with the largest variances
  4. Write one sentence explaining each: timing, price, volume or a one-time event
  5. Decide whether to change spending or update the forecast

Rolling forecasts

Many small businesses update a 12-month rolling forecast each quarter rather than relying only on an annual budget. It keeps planning current when conditions change.

Include tax payments

Budget for estimated taxes, payroll taxes and sales tax remittances. These are cash outflows that can surprise owners who plan only from the profit and loss statement. The SBA's manage your finances guidance covers budgeting and cash planning.

Keep last year's actual results beside the budget.

Share the budget with key staff.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Chart of Accounts: A chart of accounts is the organized list of every account a business uses to record transactions in its general ledger.