How to Create a Business Budget: What to Include in 2025

Without a business budget, you’re making and spending money and wishing for the best. With one, you can analyse and forecast your income and expenses to make better decisions across your operations, funding, hiring, and beyond.

This in-depth guide provides a step-by-step budget preparation process that you can begin immediately, whether you’re a small business owner, startup founder, or freelancer. Let’s get started.

Key Takeaways

• A business budget is a document that breaks down your forecasted income and expenses for an upcoming period, such as a year.
• An accurate budget helps you make business decisions, such as how much you can spend on new hires’ salaries. It also increases your financial control and helps new businesses remain afloat.
• The most common budget types are operating, cash, capital, and master budgets. You can estimate expenses using incremental, zero-based, and/or activity-based budgeting.
• Ensure you track your budgeted figures against actual earnings and costs. Also, update your budget based on new data—such as customer demand shifts.

What Is a Business Budget?

A business budget is an estimation of how much money you’ll spend over a certain period (usually a year), what you’ll spend it on, and how much income you expect.

You prepare it by analysing past revenues, incomes and expenses, forecasting future ones, and breaking down budget items based on your chosen budget type and method.

Why Create a Business Budget?

Here are the top benefits of business budgets:

• Profitability forecasting: Whatever your profit or loss in a year’s time, it won’t catch you by surprise when you have a business budget. Plus, planning what you spend and earn makes you more likely to hit your financial goals.
• Cash flow management: By budgeting your income and expenses, you know how much cash you need to pay for essentials (like rent and salaries) and whether you need debt or investment to plug any gaps.
• Financial control: Tracking actual revenues and costs against your budget helps you stay financially responsible and avoid costly debt alternatives.
• Business survival: A budget won’t guarantee your business makes it, but it increases your chances through more efficient resource allocation.

7 Steps to Create an Accurate Business Budget

Now, let’s break the business budgeting process into seven practical steps.

1. Select a budget type

There are multiple budget types to choose from, including:

Operating budget

An operating budget outlines the spending directly related to making revenues and the projected revenues themselves.

For instance, a remote desk-based team may include expenses such as salaries and software subscriptions. In contrast, an office-based team could add rent, utilities, stationery, and the inputs required to deliver the product or service.

This budget type is suitable for virtually any business or freelancer.

Cash budget

A cash budget, or cash flow budget, outlines the cash inflows and outflows you expect for the budgeting period. You use it to plan for and manage your at-hand liquidity. For example, you need cash to pay salaries, debts, and office utilities.

Here’s what you might include in your cash budget:

Capital budget

A capital budget focuses on a type of long-term investment known as capital expenditure (or CapEx). Examples include buying or repairing property and equipment, upgrading your IT infrastructure, and selling assets.

Budgeting for CapEx tells you how much you should expect to pay, borrow, or receive during the budgeting period. As a bonus, it helps lenders and investors better understand your business’s financial health and prospects.

Master budget

A master budget is a comprehensive plan with multiple sub-budgets that gives you (and other stakeholders, such as investors) a detailed overview of your operating and financial plans. Once done, it helps guide day-to-day decision-making, from choosing suppliers to hiring and allocating project resources.

It’s more common in mid-size to large businesses due to its inherent time and labour costs. That said, small businesses and solopreneurs could scale it down to their needs by selecting the most relevant components:

Here’s what a master budget usually contains:

• Part 1: Operating budget
  – Sales budget
  – Production budget
  – Cost of goods sold (COGS) budget
  – Labour budget
  – Selling and administrative expenses budget
• Part 2: Financial budget
  – Capital budget
  – Cash budget
  – Budgeted income statement
  – Budgeted balance sheet

2. Choose a budgeting method

There are three main budgeting methods you can select from: incremental, zero-based, and activity-based budgeting.

3. Choose a software tool

You can use pen and paper to estimate your revenues and expenses, but this method is prone to manual errors, data loss, and misuse. Instead, consider using software.

Here are the top four budgeting tools to consider:

Excel spreadsheet

Excel features such as formulas and conditional formatting are easy to use, and you can create a layout for your budget in minutes. For data visibility and user access restrictions, save your Excel budgets on a cloud drive.

Project management software

Some project management apps let you customise boards, tables, and other data views (such as Gantt charts) from scratch. While it may take longer to set up than an Excel sheet, the user experience is usually smooth, and there’s less room for error. Plus, there’s only one version of the truth, and you can easily create charts and reports.

Personal finance apps

If you’re a freelancer, personal finance and budgeting apps can help you set spending and income targets and track cash inflows and outflows. Your high-street bank may also offer budgeting tools in its mobile app.

Accounting software

Many top accounting platforms let you set budget categories and targets, export reports, and track cash flows. However, their steeper learning curve (compared to Excel) might burden solopreneurs with limited revenue and spending streams.

4. Forecast your income

Your future income impacts your business budget and funding. For example, landing a big client may require upfront labour, production, and training costs, with revenue arriving later. Forecasting income helps create an accurate budget.

Here’s a three-stage income forecasting model for small businesses with past earnings:

Break down your revenues

In your main income forecast table, list your high-level revenue categories.

For example, a consulting business might have ‘Retainers,’ ‘One-off projects,’ and ‘Multi-stage projects.’ Meanwhile, a freelance jewellery maker may list income sources such as ‘Market stall,’ ‘Etsy,’ and ‘Instagram.’

Further break these down into subcategories, where necessary.

Input previous periods’ revenues

Next, list the revenue figures for your categories for the past 1-5 budgeting periods (i.e., months, quarters, or years). You can find these in previous profit and loss statements, self-assessments, or investor presentations. Alternatively, check your bank statements, accounting or point of sale (POS) software, and customer invoices.

Pro tip: Add the sub-category revenues to get the individual category revenues, and repeat for the top-level categories to get your overall income for the period.

Forecast option 1: Business as usual

If you expect your revenue to grow or decline at the same speed, your forecast model should assume a similar period-on-period growth rate.

As an illustration, assume Year 1 is the budget year, Year 0 is your current one, and Year -1 is the year before. Your calculations show that the income growth rate between Year -1 and Year 0 was 20%. You can assume the same growth rate for your Year 1 income or increase it slightly (1-5 percentage points) to account for inflation.

If you’re calculating period-on-period growth rates manually (for instance, using Excel), here’s the formula:

Year 1 income = Year 0 income + (Year 0 income x % Growth rate)
% Growth rate = (Year 0 income – Year -1 income) / Year -1 income x 100

Forecast option 2: Growth plan

The second forecast option is to set an ambitious income goal without necessarily considering past earnings. This is a common forecast method for startups, scale-ups, and brand-new solopreneurs.

For example, say you spent the year developing your product and building customer relationships. Based on market research, customer feedback, and product value, you estimate you’ll win two clients, each paying £15,000. Your growth income forecast is 2 x £15,000 = £30,000.

Alternatively, freelancers might estimate how much they need to cover their personal and family expenses (say, £30,000/year) and how much they’d like to save (say, £20,000/year). Thus, their growth-based income forecast is £30,000 + £20,000 = £50,000.

Pro tip: Are you just getting started and don’t have past business finances to work with? Use the Price x Quantity formula to estimate how much you might earn per month or year. For example, a contractor may charge £40/hour and expect to work 100 hours a month, leading to an income forecast of £40 x 100 = £4,000/month.

5. Estimate future business expenses

Your expenses are costs directly related to your income-making activities. (They also appear on your profit and loss statement.) Say your income streams are from an executive assistant agency and property rental. Your staff and contractor wages and property advertising fees are expenses. However, your taxes are not.

Whatever department or activity you’re budgeting for, there are three cost types:

• Fixed costs don’t vary with the scale of your operations and outputs. These include rent, salaries, insurance, and loan repayments.
• Variable costs depend on how much you consume or produce as a business. Examples include inventories, utility bills, office supplies, and hourly contractor wages.
• Unexpected costs are unplanned and out of your control and should be covered by a contingency fund. Examples include macroeconomic changes (like inflation) or natural disasters affecting your labour force, property, and equipment.

Estimate your expenses using one or several budgeting methods. For example, you may use zero-based budgeting for operations to cut costs, incremental budgeting for salaries, and activity-based budgeting for sales and marketing.

When estimating line item costs, assume either that they remain the same (e.g., salaries, vendor quotes) or that they will rise by a few percentage points with inflation.

For variable expenses, you must also estimate quantities. Your income forecast is helpful here because you probably calculated how many units (e.g., goods sold, hours) you’ll produce. For instance, you might estimate that you must budget an extra 10 admin hours to deliver 100 construction hours to clients.

Pro tip: Keep meticulous track of your business expenses. For instance, set aside your receipts and invoices in a virtual or physical folder, and don’t delete order-related emails from vendors and clients. As a bonus, this practice will save you time during the tax return season.

6. Track budget against actual figures

Your budget is just another financial statement unless you track how it stacks against real-world outcomes. Depending on your internal resources and financial needs, track actual expenses and revenues against your budget on a daily, weekly, monthly, quarterly, and/or yearly basis.

The difference between a budgeted figure and an actual figure is called variance. Variance analysis involves calculating the positive or negative variance, investigating why it occurred, and taking action (such as reducing or increasing future budgets).

Here’s a high-level example of an operating budget against actual figures:

7. Adjust your budget based on new information

Finally, regularly review and adjust your budget. Your initial assumptions may change, and without updates, you risk facing poor financial decisions and failing to meet your business goals.

Below are examples of where you may need to update your budget:

• Supplier price changes: Vendors such as software providers may increase their prices. Likewise, raw material prices may increase or decrease if you make or use goods in your production process (say, paper, food ingredients, or gold).
• Your income projection changes: You might lose customers due to economic shifts or internal inefficiencies, so you may need to cut your spending to reduce debt. Alternatively, your business may grow quickly, meaning you might need to expand your budget to keep up with demand.
• Macroeconomic factors change: Rising inflation or interest rates could lead you to reduce your budget to stay solvent.

Pro tip: Meet regularly with your main budget stakeholders, such as your accountants and team leads, to determine whether any assumptions behind your budgets have changed.