How to Create a Business Budget (That You'll Actually Follow)

Why Most Budgets Fail

The problem with most small business budgets is not the budget itself - it is the process. Business owners spend hours creating a detailed spreadsheet at the start of the year, file it away, and never look at it again. By March, actual spending has diverged from the plan, and the budget becomes irrelevant.

A useful budget is not a static document created once a year. It is a living tool that you compare against actual results regularly, adjust when circumstances change, and use to guide day-to-day decisions.

Step 1: Start With Historical Data

The foundation of a realistic budget is what actually happened in the past. Pull your profit and loss statement for the last 12 months, broken down by month.

Review each expense category:

• What is the average monthly spend?
• Is there a trend (increasing, decreasing, stable)?
• Are there seasonal patterns?
• Were there any one-off items that should not be repeated?

Your accounting software provides this data. If your transactions are correctly categorised (SortBooks handles this automatically), your historical data is reliable. If your categories are messy, clean them up first - a budget built on bad data is worse than no budget at all.

Step 2: Project Your Revenue

Revenue is the hardest line to predict, but you need a reasonable estimate:

For recurring revenue businesses (subscriptions, retainers, maintenance contracts):

• Start with your current recurring revenue
• Add expected new clients (be conservative)
• Subtract expected churn (be realistic)
• Adjust for known price changes

For project-based businesses:

• Review your pipeline and win rate
• Estimate the number and value of projects per month
• Factor in seasonal patterns

For retail and service businesses:

• Use last year's monthly revenue as a baseline
• Adjust for growth (or decline) trends
• Factor in any planned changes (new products, price increases, marketing campaigns)

The golden rule: underestimate revenue and overestimate expenses. If you beat the budget, that is a pleasant surprise. If you miss it, you are prepared.

Step 3: Budget Your Fixed Costs

Fixed costs are the easiest to budget because they are predictable:

• Rent (known amount, adjust for any rent reviews)
• Insurance (known annual premium, spread monthly)
• Loan repayments (known amounts and schedule)
• Software subscriptions (known monthly costs)
• Base salaries (known amounts plus anticipated increases)
• Vehicle costs (lease payments, registration, insurance)

List every fixed cost with its monthly amount. These form the floor of your expenses - the minimum you spend regardless of revenue.

Step 4: Budget Your Variable Costs

Variable costs are harder to predict because they fluctuate with revenue:

• Materials and supplies (estimate as a percentage of revenue)
• Casual labour (estimate based on projected workload)
• Commissions (percentage of revenue)
• Shipping and delivery (based on expected volume)
• Marketing (set a budget as a percentage of revenue, typically 5-10%)

Use your historical variable cost percentages as a starting point. If materials have been 25% of revenue historically, budget 25% of projected revenue for materials.

Step 5: Include Tax and Super

Do not forget your tax obligations:

• GST - If your revenue is GST-inclusive, your expenses should reflect the net amounts. Budget for the quarterly GST payment.
• Income tax - Budget for PAYG instalments or year-end tax
• Superannuation - 11.5% of employee wages, paid quarterly
• PAYG withholding - The tax you withhold from employee wages (this is not your cost, but it affects cash flow)

Step 6: Build in Contingency

Things never go exactly to plan. Include a contingency line in your budget - typically 5-10% of total expenses. This covers:

• Unexpected repairs or maintenance
• Price increases from suppliers
• Unplanned but necessary expenses
• Revenue shortfalls

Step 7: Make It Monthly

Your budget should be broken into monthly columns, not a single annual number. Monthly budgets allow you to:

• Account for seasonal patterns
• Compare actual to budget each month
• Identify variances early
• Adjust the remaining months based on what has happened

Using Your Budget

Monthly Review

At the end of each month, compare your actual results to the budget:

• Revenue: Did you hit your target? If not, why? What needs to change?
• Each expense category: Were you over or under budget? Is the variance a one-off or a trend?
• Net result: Are you ahead or behind plan?

This review should take 30 minutes and provide actionable insights.

Variance Analysis

For any line item more than 10-15% over budget, investigate:

• Is this a timing issue (expense came in earlier than expected)?
• Is this a permanent change (costs have genuinely increased)?
• Was the budget unrealistic for this category?

Understanding variances helps you either correct spending or update the budget to reflect reality.

Rolling Forecast

As the year progresses, update your budget with actual results and revised projections:

• Replace each completed month's budget with actuals
• Adjust future months based on what you have learned
• This creates a "rolling forecast" that is always current and realistic

Making Decisions

Use your budget as a decision-making framework:

• "Can I afford this new hire?" - Check if the additional cost fits within budgeted expenses and whether projected revenue supports it.
• "Should I invest in new equipment?" - Compare the cost to your capital expenditure budget and cash reserve.
• "Can I increase my marketing spend?" - Check your current marketing spend against budget and evaluate the expected return.

Budget Template

A simple budget includes these categories:

Revenue

• Sales revenue (by type if relevant)
• Other income

Cost of Goods Sold

• Materials
• Direct labour
• Subcontractors

Operating Expenses

• Wages and salaries
• Superannuation
• Rent
• Utilities
• Insurance
• Marketing
• Software and subscriptions
• Vehicle costs
• Professional services
• Office supplies
• Depreciation
• Contingency

Non-Operating

• Interest expense
• Tax payments

Net Profit = Revenue - COGS - Operating Expenses - Non-Operating

The Key to Success

The businesses that benefit from budgeting are the ones that treat it as a regular discipline, not a one-time exercise. Set a monthly calendar reminder to review actual versus budget. Make it a 30-minute meeting with yourself (or your business partner or bookkeeper). Adjust the plan as you go.

A budget that you actually use is worth infinitely more than a perfect budget that sits in a drawer.