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Mastering the Art of Budgeting: How Small Business Owners Can Use a Small Business Budget to Grow

By 03/02/2023November 3rd, 2023No Comments
Small Business Budget

Small business owners, it’s time to take your financials to the next level. With a solid small business budget and the right key performance indicators (KPIs), you can track your progress and drive growth. In this guide, we’ll cover everything you need to know about setting a budget and using KPIs to make informed decisions that will take your business to new heights.

In this article, we will take a deeper look into the world of budgeting for small business owners. We’ll start by answering the question of ‘what is a budget’, and how it differs from a financial forecast. We’ll also explore what should be included in a budget, so you can make sure you’ve got all the key elements in place. Next, we’ll discuss the importance of tracking your budget and comparing it to your actual results each month in order to make any necessary adjustments. Finally, we’ll delve into how to set key performance indicators (KPIs) off the back of your budget, so you can measure progress towards your growth goals and make data-driven decisions to help your business grow.

Small Business Budget 101: Understanding the basics

A budget is essentially a financial plan for your business. It’s a document that outlines your projected income and expenses for a specific period of time, such as a month or a year. The purpose of a budget is to help you manage your finances and make sure you have enough money to cover your expenses while also reaching your financial goals.

The benefits of having a budget in place are numerous, and the more granular you can be the better. For one, it helps you stay on top of your finances and avoid overspending – if you have a set spending budget for stationery, you will likely be less frivolous! It therefore also allows you to identify areas where you can cut costs and potentially save money. 

It’s a common misconception that a budget only involves limiting the money the business can spend on certain things. However, budgets also include forecasting into the future; projecting how your expenditure is going to affect figures such as turnover, and keeping track of the results to make sure you are getting the right “bang-for-your-buck” is a very important part of a budget.

When it comes to small business growth, a budget plays an especially important role. By setting financial goals and forecasting future income and expenses, a budget can serve as a roadmap for growth. It can help you identify areas where you need to increase revenue – or other KPIs – or reduce costs in order to reach your goals. Additionally, a budget can be used to track progress and measure the success of your growth strategies over time.

Don’t let the thought of budgeting intimidate you, think of it as a roadmap for success!

Forecasting the Future: How to differentiate between a small business budget and financial forecasts

When it comes to financial planning for your business, it’s important to understand the difference between a budget and a financial forecast. While both are important inter-linked tools for managing your finances, they serve slightly different purposes.

It makes it easier to visualise if we look at the financial forecast first. A financial forecast is a prediction of future financial performance. It’s a document that estimates your future income and expenses based on past performance and current trends. The main purpose of a financial forecast is to help you plan for the future and make informed decisions about your business’s future and how you expect to perform. It can be more of an art than a science, but it’s an essential tool to have.

On the other hand, a budget is a detailed plan for your projected income and expenses for a specific period of time. It’s much more of a science than a projection. It’s a document that outlines exactly how much money you are planning to spend in order to bring in what your financial forecast is projecting. The main purpose of a budget is to help you manage your finances and make sure you have enough money to cover your expenses while also reaching your financial goals.

A small business that uses both will be lightyears ahead of its competition, and you will become better and better at creating both by diving right in and creating them. Practice makes perfect! By having both in place, you are able to have a detailed plan for the short-term and a prediction for the long-term.

Creating a Roadmap to Growth: Elements of an effective small business budget

When it comes to creating a budget for your small business, there are a few key elements that you should include:

  • Revenue: This is the money that you expect to bring in from your sales and other sources of income. Be sure to include both your projected sales and any other sources of income, such as investments or rental income if relevant.
  • Expenses: This is the money that you expect to spend on things like salaries, rent, and other operating costs. Be sure to include all of your fixed and variable expenses, as well as any one-time expenses that you anticipate.
  • Net income: This is the difference between your revenue and expenses. It’s important to keep an eye on your net income to make sure that you’re not spending more than you’re bringing in.
  • Cash flow: This is the amount of money that is flowing in and out of your business. A positive cash flow means that you have more money coming in than going out, while a negative cash flow means the opposite. It’s important to keep an eye on your cash flow to make sure that you have enough money to cover your expenses.
  • Budget vs. actual: This is the comparison between the budgeted and actual results. By comparing your budgeted and actual results, you can identify areas where you’re over or under budget, and take corrective action.

What actually ends up in your budget is completely individual. The above ideas are a great start, but product based businesses will need to track things such as margin, and service based businesses may need to more closely track salaries to ensure they are not overspending when generating their revenue.

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Real-Time Adjustments: How to track your small business budget and make informed decisions

Having a budget in place is just the first step. Once you’ve created your budget, it’s important to keep track of your actual results and compare them to your budgeted results. This will help you identify areas where you’re over or under budget and take corrective action. Here are a few ways to keep track of your budget:

  • Monthly review: Set aside time each month to review your budget and actual results. Compare your budgeted and actual revenue and expenses, and look for any variances.
  • Use budgeting software: There are many budgeting software options available that can help you keep track of your budget and actual results. These tools often include features like automatic data import, forecasting, and reporting.
  • Utilise financial reports: Financial reports like income statement, balance sheet and cash flow statement can be generated in most accounting software, it can be a great way to get a clear overview of your finances.
  • Communicate with your accountant: If you work with an accountant, they can help you understand your budget and actual results and provide valuable insights and advice. Additionally, if you are really struggling to know what to include in your projections and budgets, a good accountant is a very good place to start.

By keeping track of your budget and actual results, you can make sure that you’re on track to reach your financial goals and by reviewing results regularly, you can flag small issues before they become big ones.

Measuring Success: Setting and tracking key performance indicators

Once you have your budget in place and are keeping track of your actual results, you can use this information to set Key Performance Indicators (KPIs) for your business. KPIs are specific, measurable, and time-bound goals that help you track your progress and measure your success.

Small businesses can see significant impact on their sales by focusing on numbers that contribute to the turnover or profit figures, rather than just setting large targets to aim for. Your budgets and KPIs should provide a roadmap to success, not a pie-in-sky figure that you like the sound of!

Sometimes these large figures can feel daunting, so by using your budget and working backwards from turnover, you should be able to set high-impact KPIs that provide said roadmap. Here are some examples:

For your website:

  • Sales conversion rate: Set a goal for the percentage of visitors that are converted into sales.
  • Average sale value: Set a goal for the average value of each sale made.

These two KPIs show how much of your traffic will place an order, and then how much each order will be worth. From here, you can see how much traffic you will theoretically need to generate to hit your revenue goals, and you can work on increasing the right numbers. 

For your subscription service or service business:

    • Customer Churn Rate: Set a goal for the percentage of customers that stop being customers every month.
  • Customer Lifetime Value (CLV): Set a goal for the estimated value of a customer to your business over their entire time with you.

Using these two KPIs means you know how long a customer is likely to stay a customer, and then how much turnover they are likely to provide during their time as a customer. These KPIs will allow you to calculate things like how much you are able to spend on your marketing to gain a customer, and subsequently how much you will need to spend on average to attract the right amount of custom.

For your goods business:

  • Gross profit margin: Set a goal for the percentage of each sale that is gross profit.
  • Cost of goods sold (COGS): Set a goal for the total cost of the goods sold in relation to the sales made.

In a traditional retail, e-commerce or other business where you sell goods, these two KPIs are effective. They are fairly interlinked, but both are good to keep track of. If you know your gross profit margin, you can more accurately set sales targets. You will need to set sales targets to cover all your costs and leave a little net profit at the end, and if you know what your margin is, you know how high these sales targets need to be to cover it all!

By setting and tracking KPIs, you can gain insight into the financial performance of your business and make data-driven decisions to achieve your growth objectives. An exercise very worthy of your time.


A budget is an essential tool for any small business owner looking to grow their business. It helps you plan for the future and track your progress, so you can make informed decisions and achieve your financial goals. By understanding the difference between a budget and a financial forecast, by including all the necessary elements in your budget, by keeping track of your budget and actual results and by setting impactful KPIs, you can use your budget as a roadmap for growth.

As a small business owner, it’s important to remember that having a budget in place is just the first step. Keeping track of your budget and actual results, and adjusting your budget as necessary, is crucial to the success of your business. And it’s also important to work with a professional accountant who can provide you with valuable insights and advice.

At Direct Peak Accountants, we understand the importance of budgeting for small business owners. As an accountancy and bookkeeping firm, we can help you create a budget and provide you with the support you need to stay on track. After all, it’s an ongoing process and it’s easier to stay on track and accountable with someone reliable alongside you. Contact us today to learn more about how we can help your business grow.

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