Most small business owners don’t have a budget.
They have a guess.
A vague sense of “we should make about this much” and “we shouldn’t spend more than that.” That’s not a budget. That’s hope with a calculator.
A real budget tells you three things:
- What you expect to make.
- What you expect to spend.
- What’s left over (or what’s missing).
You don’t need an accounting degree to build one. You need a few hours, last year’s numbers, and a willingness to be honest with yourself.
Here’s how.
Step 1: Pull the last 12 months
Open your bank statement. Or QuickBooks. Or that one spreadsheet you keep meaning to clean up.
Get the last 12 months of revenue and expenses out of it.
Don’t worry about getting it perfect. Get it close.
- Total revenue: one number.
- Total expenses: one number.
- Profit (or loss): one number.
This is your starting point. You can’t budget the future if you don’t know the past.
Step 2: Split your costs into two buckets
There are only two kinds of costs that matter for your first budget.
Fixed costs. Rent. Software subscriptions. Insurance. Salaries. The stuff you pay every month whether you sell anything or not.
Variable costs. Materials. Shipping. Sales commissions. Payment processing fees. The stuff that goes up when sales go up and down when sales go down.
Take your 12-month expense list. Sort every line into one of these two buckets.
That’s it. Two columns.
Most owners discover something here: their fixed costs are bigger than they thought, and their variable costs are messier than they thought.
Good. That’s the point.
Step 3: Project next year’s revenue (conservatively)
Take last year’s revenue. Now ask three questions:
- Is my market growing or shrinking?
- Am I doing anything different this year?
- What could go wrong?
Then pick a number that feels slightly uncomfortable on the low side. Not depressing. Just realistic.
If last year was $400K and you grew 20%, don’t assume 20% again. Assume 10%. Build in a buffer.
The biggest budget mistake is assuming your best month is your average month. It’s not. Your average month is your average month.
Step 4: Project your costs
Fixed costs first.
Pull each line forward into next year. Add anything new (new software, new hire, higher rent). Subtract anything you’re cutting.
Then variable costs.
This part trips people up. Variable costs scale with revenue. So if you’re projecting 10% revenue growth, your variable costs should grow about 10% too. Not zero. Not 50%.
Build the math right into the spreadsheet:
Variable cost = revenue × cost percentage
If shipping was 8% of revenue last year, project it at 8% of next year’s revenue. Done.
Step 5: Build it month by month
A yearly budget is useless. A monthly budget is a tool.
Why? Because your business doesn’t earn or spend evenly across the year. December looks nothing like June. Tax payments hit in specific months. Insurance renews on a date.
Take your annual numbers and break them down by month. Use last year’s monthly pattern as a starting point. Adjust for anything you know about – a launch, a slow season, a planned hire.
Now you have 12 columns. Each one shows expected revenue, expected costs, and expected profit.
That is a real budget.
Step 6: Compare actuals every month
This is the step nobody does. And it’s the only one that matters.
At the end of every month, put your actual numbers next to your budgeted numbers. Two columns. Side by side.
Where did you beat the budget? Where did you miss?
Don’t beat yourself up. Just notice.
After three months you’ll start seeing patterns. Maybe you keep underestimating software costs. Maybe revenue spikes harder in March than you expected. Maybe payroll keeps creeping up.
This is how a budget stops being a guess and becomes a tool.
Common mistakes to avoid
Skipping the boring categories. Bank fees, software trials, that one weird subscription nobody uses. These add up. Track them.
Forgetting taxes. Set aside 20–25% of every dollar of profit for taxes as a starting estimate. Don’t get caught flat-footed at year-end.
Treating the budget as a contract. It’s not. It’s a forecast. When reality changes, the budget changes. Update it quarterly.
Hiding from bad numbers. If you’re behind budget, look at it. Don’t avoid it. The avoiding is what kills businesses.
You don’t need fancy software
Google Sheets works. Excel works. A free template works.
What matters is that the numbers are honest, the categories are clear, and you actually look at it every month.
A perfect budget you never check is worse than a rough budget you review every Friday.
When to bring in help
If you’ve tried this and the numbers don’t make sense – your bank balance and your books disagree, you can’t tell which products are profitable, your margins are bouncing around with no clear cause – you’ve outgrown the DIY phase.
That’s not a failure. That’s a milestone.
It means your business is big enough that the seat-of-the-pants approach is costing you money. Time to build a real finance function.
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Stop guessing. Start running on numbers.
Frac CFO builds budgets that actually work – connected to your real books, updated monthly, reviewed against actuals so you always know where you stand. No finance degree required on your end.