Creating a small business budget: a guide for UK merchants

Creating a small business budget is crucial for strengthening your business’s financial health.

From analysing your income to predicting costs, understanding the fundamentals of budgeting helps you make informed financial decisions to suit your revenue.

It’s also essential for allocating resources effectively and covering unexpected costs, increasing your chances of long-term sustainable success and suitable financial risk management.

To help you accurately predict your future finances, we’ve put together a complete guide to small business budgeting for UK merchants.

Learn more about identifying expenses when starting a business, using data to inform spending, and choosing the right small business budgeting style to meet your financial goals.

Understanding the basics of a small business budget

Budgeting for small business owners is essential for maintaining your finances and understanding how much it costs to start a business.

To learn more, we’ve taken a look at the basics you need to get started.

What is a small business budget?

The purpose of a budget for small business owners is to create an overview of your future finances that balances income and expenses.

By looking ahead, you’ll be better able to adjust your spending to account for:

• Fixed costs (those that remain the same regardless of your income).

• Expected revenue.

• Goals and future business opportunities.

Without a small business budget, you could risk spending more money than you can afford.

It also becomes harder to manage and allocate income to effectively build an emergency fund for your small business, leaving you vulnerable to financial challenges in the future such as paying your employees on time.

Importance of small business budget and the key metrics

By forecasting your income and expenses, you gain a better understanding of how much working capital (the amount of money needed to fund day-to-day operations) your business needs.

You can also pinpoint growth opportunities and ensure long-term operations are properly funded.

To create an accurate forecast for your small business, utilise existing financial data from your revenue streams.

Profit and loss statements

Profit and loss statements (P&L) record your income and expenses over specific periods.

You can use P&L statements when creating a budget for your small business to identify revenue trends, including seasonal fluctuations, and to assess your profit margins.

Cash flow statements

Monitoring the money that flows in and out of your business makes it easier to balance your upcoming finances. For example, by highlighting your regular monthly expenses in a cash flow statement, you’ll gain a clear overview of any expected costs.

Balance sheets

By analysing snapshots of your business’s financial position over time, you can monitor changes in assets, liabilities and equity.

This allows you to view available resources and existing small business loan debts and align your small business budget with your current position and financial standing.

Sales reports

Tracking your revenue and identifying trends in sales can provide valuable insights into how your business is performing over time.

Use this information to calculate a realistic sales forecast and in return, you will have a more accurate and effective budget for your small business.

Expense reports

Use historical records of your spending to predict future patterns, identifying recurring costs as well as emergency expenses.

Expense reports are valuable tools for forecasting future financial needs and identify areas where you can reduce costs when running a business.

Using budget templates and spreadsheets

When creating a small business budget, a forecast template makes it easier to get started. These templates outline key information to record, such as:

• Total revenue.

• Cost of goods sold (COGS).

• A breakdown of your overheads.

Forecast templates provide a framework that ensures consistency making it easier to track your finances and make adjustments to improve your cash flow management.

Another option is to learn how to make a small business budget spreadsheet. This do-it-yourself (DIY) approach is cost-effective and can be tailored to suit your unique business needs and goals. To get started:

• Add your key categories into separate columns (rent costs, material costs, and income sources).

• Input historical financial data into these columns to inform your predictions.

• Calculate the income needed to cover your expenses.

• Add a profit margin to reflect the percentage of profit you aim to generate after covering costs.

By tailoring your spreadsheet to your specific needs, you can create a budget that precisely aligns with your small business’s financial goals and operational needs.

Once you’ve created your forecast spreadsheet, it can be used for scenario planning. This allows you to track costs against your budget and prepare you for changes in sales, unexpected expenses, or fluctuations in supplier costs.

Taking this proactive approach is beneficial for small businesses in particular, helping you make quicker, informed decisions while maintaining financial stability.

Budget support for small businesses in the UK

Budget support for small businesses can help merchants overcome financial challenges, such as unexpected expenses or managing debt.

Effective budgeting can give you the flexibility to undertake new projects and explore business opportunities by ensuring you have the necessary funding in place to start with. It can also prevent loss of revenue due to cash flow constraints.

Budget support includes grants, such as the UK government’s innovation competitions and research and development (R&D) funding.

Other options when looking into budget help for small businesses include:

• Tax reliefs and allowances.

• Government grant funding

• Local growth hubs

It’s worth looking into government-backed schemes such as small business loans, which can provide further financial support as you look to manage and grow your business. 

6 steps to creating a small business budget

For informed financial planning and decision-making, every small business whether you’re a sole trader or a limited company needs a budget.

Follow these 6 steps to learn how to make your own small business budget.

1. Assess your income sources

To predict your revenue, analyse your existing income sources. These can include:

• Product sales.

• Service sales.

• Subscription and membership fees.

• Interest from investments.

• Incoming small business grants.

Review how much income you’ve received over a period of time, such as the past month or year, from each of these sources.

With a clear understanding of your past income, it’ll be far easier to predict future revenue and develop a cash flow forecast for your small business. You’ll also be able to spot trends in sales and create agile business plans to support fluctuations.

Income is then balanced against your expenses when creating your budget. Your predicted revenue should cover your predicted costs.

2. Determine fixed and variable costs

In small business accounting, there are fixed, variable, and one-time costs.

Understanding each type will help create a comprehensive budget that accurately reflects your business expenses.

Fixed expenses

Your fixed expenses remain the same regardless of your revenue.

Let’s say, for example, that you’re a sole trader selling sustainable soaps at a local market. Your fixed costs would include the market stall fee, your travel expenses, and any business insurance payments.

If you run an online store, any costs associated with this, such as a monthly subscription, would come under fixed expenses.

When you’re registered as a limited company or operating as a sole trader, understanding your small business’s fixed and variable costs are important elements to building a reliable and functional small business budget.

Variable expenses

Your variable expenses are those that change regularly based on your small business activity.

Revisiting our previous sustainable soap trader example, a variable expense would be the materials used.

You may also have variable marketing costs. A Google AdWords budget for a small business, for example, could change month-on-month.

Examples of fixed and variable expenses

One-time costs

Alongside fixed and variable expenses, as a small business owner you’ll likely need to factor in one-time costs. These are expenses that happen only once and can lead to budget changes for small businesses, with a one-off increase in your expenses over a period of time.

Let’s say that your sustainable soap business is expanding. To meet growing demand, you need to relocate to a bigger facility. This would involve one-time costs such as legal fees and moving expenses.

Other examples of one-time costs include:

• Renovation costs for your business premises.

• Costs associated with a business relocation.

• Legal fees.

• One-off travel costs (such as to a business or networking event).

3. Plan for seasonal and unexpected changes

When managing your budget and small business expenses, anticipate fluctuations.

By forecasting potential financial changes, you can better adapt and ensure greater stability. Get started with these tips:

Seasonal changes and trends 

Use your historical financial data to identify times of the year when sales increase or decrease. For example, a financial analysis may highlight a trend of increased sales at Christmas but a decline in January.

Recessions and inflation

Changes in the economy can impact your costs, with inflation leading to increased material expenses and recessions causing a decline in revenue. An emergency fund can help you adjust to these changes, while an agile business plan makes it easier to respond to the economy.

Governmental changes

Certain governmental laws can affect business budgets. Brexit, for example, increased shipping costs for some overseas products, directly impacting small business budgets.

Changes in business taxes can also reduce your net profit (your total profit after expenses are deducted).

Debt repayments

Business loan repayments can fluctuate due to changes in interest rates. Stay prepared by maintaining contact with your lender and creating a financial reserve or emergency fund. You can also opt for fixed interest rates for more predictable payments.

Building an emergency fund

To improve cash flow resiliency and to better handle financial challenges, set aside a reserve for emergencies. This can be used to cover unexpected expenses.

For example, if you run a gardening business as a side hustle, you’ll need money set aside in case any of your equipment breaks. If you see a seasonal decline in revenue during the winter, this will also help you cover fixed costs.

Once your small business is generating a net profit, you can begin setting aside money each month as a reserve.

Add a section into your small business annual budget template to account for savings.

You can also set up a direct debit into your business savings account to automate your emergency fund contributions. If your net profit fluctuates, you may want to increase or decrease your contributions accordingly.

4. Make a small business budget

Whether you’ve launched your first online business or managing a franchise business, different types of budgeting suit different types of business. To learn more, we’ve taken a look at some common budgeting styles.

Zero-based budgeting

Zero-based budgeting involves analysing your costs and starting a new budget from scratch, rather than basing it on your past financial figures.

Each expense must be justified, with a review of how useful the service or product is. You’ll also review your costs to ensure that you’re paying the right amount for your business needs.

Although often tied to the start of a new financial year, zero-based budgeting can be implemented at any time to help you reassess spending and make sure resources are being used efficiently.

Zero-based budgeting is a great strategy for UK merchants who need a flexible budget to shift with their small business. It’s particularly useful for small businesses looking to control costs and maximise profitability.

Merchants starting a business may carry out zero-based budgeting more frequently - such as once a month - in order to adjust their spending to suit changing needs.

Though this is a time-consuming process, it generates budgets based on current information rather than historical data. This can lower your costs, increase operational efficiency, and reduce waste.

Top-down budgeting

When carrying out top-down budgeting, budgets are set for different departments within your business. Managers or team leaders of these departments then allocate their budget accordingly.

There are a number of advantages to top-down budgeting, including:

• Allowing managers to continue running their departments while you focus on the budget to reduce disruption.

• Managers can use their specific knowledge to properly allocate the budget.

• Secured buy-in from your managers, removing any issues with allocation.

It also ensures that your budget aligns with your long-term goals and future business opportunities.

Top-down budgeting is typically better suited to small businesses where the owner or management team share a clear vision and a strong understanding of the company’s strategic goals.

Let’s say, for example, that you run a vegan wine bar and you’re looking into small budget business ideas. After an internal financial analysis and reviewing your data, you know that themed Fridays are a cost-effective way to increase revenue.

For the next period, you can allocate more budget to themed events. This will have the potential to result in an increase in revenue and profits. 

Bottom-up budgeting

Bottom-up budgeting involves working with your team to create your budget and is most suitable for small businesses that hold a strong value on collaboration and detailed insights from different departments.

Bottom-up budgeting is an excellent way to encourage a sense of ownership, motivate employees and create a positive work environment among your team.

Involving your team in the budgeting process has the potential to encourage a greater commitment from them to meet targets, as they had a direct hand in setting them.

Rather than focusing on your business goals - as with top-down budgeting - your team will compile a list of their expenses and cost projections. You’ll then use this to allocate your budget.

For example, as a wine bar owner, you might ask your chefs, sommeliers, and marketing department to submit their budget requirements. You’ll then use this to calculate your expenses and allocate resources.

This is a collaborative approach to budgeting that allows your team’s understanding of their departments to guide your small business finances.

Creating a marketing budget

Allocating funds for marketing (such as email marketing and social media marketing) are essential for business growth. Marketing can drive brand awareness, attract new customers and support your long-term business goals.

Whether you’re launching your first low cost high profit business ideas or looking for ways to expand your reach, understanding how to structure your marketing budget can make a big difference to the trajectory of your brand.

When creating an advertising budget for small businesses, it’s worth considering:

• Your marketing goals.

• How much revenue you can allocate to advertising your business. The average marketing budget for a small business is 9.5% of revenue, though start-ups may need to increase this to 12-20% as you launch and grow your business.

• The channels that see the best return on investment (ROI) for your business.

If you don’t have previous marketing data to determine the ROI of different strategies, market research is a smart solution. Some tips for UK merchants looking to get started include:

• Viewing online studies to determine the average ROI of marketing methods.

• Conducting a competitor analysis to discover the channels similar businesses are using.

• Surveying your target market to find out how they’re influenced by different marketing strategies.

It’s worth reviewing and adjusting your budget regularly, using performance metrics such as impressions, click-through rate, and conversions to optimise your spending.

5. Choose the best budgeting tools and apps

When creating a budget, you can make the task simpler by using apps, software and accounting tools designed for small businesses.

Let’s take a look at some of the best budgeting apps for small businesses to learn more about how digital tools can simplify budgeting:

Cloud-based spreadsheets 

Check your budgets remotely and share them with your team, accountant or financial advisor by utilising cloud software.

Expense tracking 

Record your expenses automatically and keep a digital record of your business costs using a tool like the SumUp business account.

Predictive analysis

Use artificial intelligence (AI) to gain insights from your past financial data and generate automatic predictions of your future income and expenses as part of your cash flow forecast.

Bookkeeping software

Efficient bookkeeping for small businesses makes it simpler to manage your net cash flow and utilise this data for future budgets.

Quicker payment tools

If your business relies on your income to cover your expenses, choose payment solutions that offer reliable payouts to prevent operating cash flow issues from affecting your budget.

6. Regular review and adjustment

Reviewing your small business budget regularly ensures your finances remain aligned with your business goals.

You’ll also be able to identify differences between predicted and actual income or expenses, adjusting your budget for a realistic financial overview.

There are different milestones and opportunities that can trigger a budget review, including:

• New product prices or service prices.

• Changes to your supplier costs.

• Business expansions (such as hiring staff or increasing production).

• Filing year-end accounts or submitting your tax return.

New or growing businesses can benefit from reviewing budgets more frequently (every month or quarterly) to ensure you’re managing cash flow effectively and meeting financial targets.

You can also choose to carry out budgets that review monthly cash flow or year-to-date cash flow. We’ve compared the 2 so that you can make the right choice for your small business:

If you’re unsure which is right for your business, speak with an accountant. Their professional experience can help guide your financial decision-making.

Your accountant may also conduct budget reviews on your behalf, leaving you with more time to run and manage your small business.