How to create a small business budget: Step-by-step guide

Published Friday 10 October 2025

Table of contents

• What is a small business budget?
• Why your small business needs a budget
• What to include in your small business budget
• How to create your small business budget step by step
• Types of small business budgets
• Small business budget templates and examples
• Testing different budget scenarios
• Tools to simplify your budgeting process
• Take control of your business finances with Xero
• FAQs on small business budgets

Key takeaways

• Gather accurate historical data by reviewing 12 months of bank statements and accounting records to calculate monthly averages for variable costs and verify exact amounts for recurring expenses like rent and insurance.

• Create a comprehensive budget that includes three main components: income from sales and services, expenses divided into fixed costs (rent, utilities) and variable costs (supplies, marketing), and the resulting profit or loss calculation.

• Test different budget scenarios by adjusting variables like sales increases, client losses, or cost changes to understand how these factors affect your business and determine when you can afford major decisions like hiring employees.

• Use your budget as a strategic decision-making tool to identify wasteful spending, calculate required sales targets to cover costs, and determine available funds for growth investments and owner compensation.

What is a small business budget?

A small business budget is a financial plan that estimates your income and expenses over a specific period, like a month, quarter, or year. It shows you where your money comes from, where it goes, and what remains. It helps you track where your cash is coming from, where it's going, and what's left over.

Creating a budget isn't about restricting your business. It's about understanding your financial health so you can make smarter decisions, plan for growth, and stay in control of your finances.

Why your small business needs a budget

A budget helps you make confident decisions about your business. It shows you where you stand and helps you reach your goals.

Here are a few key benefits of having a business budget:

• Make informed decisions: See if you can afford to hire a new employee, invest in equipment, or launch a marketing campaign.
• Measure performance: Compare your actual income and expenses to your budget to see what's working and what isn't.
• Secure funding: Lenders and investors want to see a solid budget before they provide funding.
• Prepare for the unexpected: A budget helps you build a cash reserve to handle slow months or unexpected costs without stress.

What to include in your small business budget

Small business budgeting has three main parts:

• Income: Money coming into your business from sales and services
• Expenses: Money going out for costs like rent, supplies, and payroll
• Profit or loss: The difference between what you earn and what you spend

Income statement report

An income statement shows if your business is profitable by comparing total income to total expenses over a set period. This report quickly shows whether you are making money or not.

How it works: Subtract your total expenses from your total income. If the result is positive, you are making a profit. If not, you may need to review your expenses or income.

Income (revenue) represents all money your business generates from sales and services. Track these two categories:

• Recurring income: Regular, predictable revenue from client retainers, subscriptions, and contract work. It's important to track this income carefully, as clients who pay you $600 or more in a year are required by the IRS to report those amounts paid to you.
• Expected income: Forecasted revenue based on sales pipeline and historical trends

Expenses (costs) include all money spent running your business. Organize expenses into two main categories:

• Fixed expenses: Regular monthly payments like rent, utilities, insurance, and payroll
• Variable expenses: Occasional costs like office supplies, marketing campaigns, and client entertainment

Common overlooked expenses can significantly impact your budget accuracy. Include these often-missed costs:

• Depreciation: Equipment and technology lose value over time—factor in replacement costs
• Complete payroll costs: Include salary, taxes, benefits, workers' compensation, and training expenses. For self-employed individuals, this includes paying self-employment (SE) tax if your net earnings from self-employment were $400 or more.
• All overhead expenses: Don't miss utilities, insurance, professional fees, and software subscriptions
• Debt service: Include all loan payments, credit card interest, and equipment financing

When your revenue is higher than your costs, you make a profit. If your costs are higher, you may need to adjust your budget. While some losses can happen, aiming for long-term profitability is important.

If you make a profit, think carefully about what to do with it. Could you:

• drive bigger profits by reinvesting in the business?
• save money by paying down debts quicker?
• keep cash in reserve to ride out future revenue dips (this is an especially big consideration for seasonal businesses)?

A business budget helps you choose the best way to use your profit. A financial advisor can help you find the most tax-efficient plan. Budgeting for taxes can help avoid cash flow surprises.

According to the IRS, you generally have to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year, making it a critical line item in your budget. Explore our tax preparation overview.

Balance sheet

A balance sheet shows your business's net worth by comparing what you own (assets) to what you owe (liabilities).

Formula: Assets minus liabilities equals your business equity or net worth. On the plus side of the balance sheet you'll find:

• the value of the assets owned by your business, such as work tools or real estate
• cash you have in the bank
• invoices that have been sent to clients but have not yet been paid

All of these are business assets. On the other side of the balance sheet are your liabilities, which include:

• expenses that have been incurred but not yet paid, such as bills from suppliers
• taxes that are due to be paid in the near future
• loans or other business debts that you have

The balance sheet shows your assets minus your liabilities.

Trial balance

Trial balance is another very useful accounting concept. It shows all your debits, credits, assets and liabilities on a single document. In other words, it represents the entire balance of your business accounts.

Accurate budgeting involves understanding key financial statements. With all this information at your fingertips, you're ready to start setting a budget.

How to create your small business budget step by step

Creating your budget transforms historical data into a forward-looking financial plan. Your completed budget will show you:

1. Operating costs: How much you need to spend running the business each month
2. Investment capacity: Available funds for growth, equipment, and improvements
3. Owner compensation: How much you can pay yourself and any shareholders
4. Cash flow timing: When money comes in and goes out throughout the year

A budget will also give you a much better idea of what your cash flow will look like. This will help you avoid running out of money and getting into a tight spot with creditors. Your budget will also show you where you can make savings. Managing your budget is just one part of overall cash flow management.

Types of small business budgets

Not all budgets are the same. Depending on your goals, you might use different types to get a clearer picture of your finances. You don't need to be an expert on all of them, but it's helpful to know what they do.

• Operating budget: This is the most common type. It forecasts your day-to-day income and expenses, like revenue, rent, and payroll, usually for a full year.
• Cash flow budget: This budget tracks the actual cash moving in and out of your business. It helps you ensure you have enough money on hand to pay your bills on time.
• Master budget: This combines your operating budget, cash flow budget, and other financial plans into one comprehensive overview of your business's finances.

Small business budget templates and examples

You don't have to start from scratch. Using a template can simplify the process and ensure you don't miss anything important. A basic budget template typically includes sections for your income sources and expense categories.

For example, your income might list sales from different products or services. Your expenses would be broken down into fixed costs (like rent) and variable costs (like supplies). Seeing it all laid out helps you spot trends and make adjustments.

Testing different budget scenarios

Once you have a basic small business budget, you can start playing with the numbers.

• What if sales go up by 10 percent?
• What if you lose your biggest client?
• What if you negotiate lower rent?

You can try dozens of different variables here. Many businesses use this type of exercise to find out when they can afford to hire employees. You can too, by adding payroll to your costs and seeing how that affects your profit.

Create different versions of your budget to test various scenarios. This helps you see how changes affect your business.

Tools to simplify your budgeting process

You can start setting your budget now. Gathering your financial records takes time, but using accurate data is worth the effort.

If you're looking for a quicker and less error-prone way to build a small business budget, consider accounting software. When set up right, an accounting system will automatically record all your income and expenditure so you don't have to manually gather the information.

Smart software can also show your income and expenditure in graphs and charts. That makes it much easier to spot trends and see how your business is performing.

Take control of your business finances with Xero

The real advantage of setting a budget is that it helps you make strategic business decisions. Not sure what's going to happen over the next six months? Try a variety of different scenarios and see what numbers emerge.

Having a budget also means you're able to seek finance. So if you find you need a loan for something, you have everything you need to go and apply for one right away.

But most of all, a budget gives you more certainty and confidence. You get a clearer picture of the state of your business and you know where you stand. A budget gives you a clear view of your business and helps you plan your next steps.

A small business budget is flexible. As your situation changes, update your figures to see how it affects your profit.

Try Xero for free to help manage your budget.

FAQs on small business budgets

Here are some common questions and answers most small business owners may have about building their budgets.

What is a good budget for a small business?

Every business is different. A good budget is realistic for your business and industry. It should accurately reflect your income and expenses, and help you work toward your financial goals, whether that's growing revenue or increasing profitability.

What is the 70/20/10 budget rule for a business?

The 70/20/10 rule is a guideline for using your after-tax profit. Put 70 percent toward operating expenses, 20 percent into savings or investments, and 10 percent as profit. Use this as a starting point, and adjust it to fit your business needs.

Is $10,000 enough to start a small business?

For many types of businesses, $10,000 can be more than enough to get started. Service-based businesses, freelancers, and e-commerce stores often have low startup costs. The key is to create a detailed startup budget to understand exactly where that money will go, from licenses and software to marketing and supplies.