How to craft an annual budget for your business in 6 steps

Running a business implies more than selling and attracting customers/clients. It is also important to handle money wisely. To achieve this, it is key to have an annual budget that helps you plan income, expenses and financial objectives. If you have never made one before, don't worry: here, we explain to you how to craft it easily in six steps.

What is an annual budget?

An annual budget is a tool that allows you to forecast the income and expenses of your business for one year. With it, you can ensure that the money is used efficiently and avoid unpleasant surprises.

Crafting an annual budget is just as important for large companies as it is for entrepreneurs and small businesses. Indeed, both large investors and small business owners will be able to have total control of their resources.

The 6 steps to create your annual budget

Although crafting an annual budget may sound complicated, the reality is that it is very simple to do if you follow to the letter the steps that we offer you below.

Step 1: Determine your essential expenses

Before you project how you will spend the money, you must first identify what you need in order to operate your business. Think about:

Rent or payment of premises.
Personnel wages and benefits.
Raw materials and products.
Basic services such as electricity, water and internet.
Marketing and advertising costs.

Making this list will help you to understand your fixed and variable costs and to prioritize the most important ones.

Step 2: Estimate expected income

Now it is time to calculate how much money you expect to generate in the year. To do this, review:

Sales from the previous year (if applicable).
Market trends.
High and low seasons.
New growth strategies.

If your business is new, research your competition or make projections based on a realistic sales plan. This is a very important research stage for your business, so try to obtain as much information as possible.

Step 3: Calculate additional costs and unexpected expenses

There are always unforeseen events, so it is advisable to allocate a percentage of your budget to unexpected expenses. It can be an urgent repair, an investment opportunity, or any other unplanned expense. A good practice is to allocate between 5% and 10% of your income to this contingency fund.

Step 4: Define your investment priorities

Not all the money should be spent on day-to-day operations. Identify areas where you could invest to grow your business, such as:

Acquisition of technology or machinery.
Employee education and training.
Expansion of products or services.
Digital marketing strategies.

By prioritizing smart investments, you can help increase your profits in the future. Do not spend unnecessarily and think very calmly before making a heavy expense. You can ask experts in the sector where you perform.

Step 5: Organize your cash flow

Knowing when money comes in and when money goes out is key to not running out of liquidity. Divide your income and expenses from month to month and make sure that there is always enough cash to cover essential costs.

Take into account that there will be months when income will be low. Therefore, think about adjusting your expenses or look for sources of financing.

Step 6: Monitor and adjust your budget

A budget is not a fixed document, but a flexible guide that should be reviewed periodically. At least every quarter, analyze whether revenues and expenses are aligned with plan. In the event that you observe deviations, adjust the figures and make quick decisions to correct errors.

What tools to use in order to craft an annual budget?

Nowadays, there are many digital tools that can facilitate the crafting and follow-up of a budget, such as:

Spreadsheets (MS-Excel or Google Sheets): Ideal for customized budgets.
Apps for the financial management of payments: Such as QuickBooks, Wave or Zoho Books.
Accounting software: Especially useful for growing businesses.

More in the Finance for Entrepreneurs program

Making an annual budget for your business is not as complicated as it seems. For more information on business finance, follow closely our “Finance for Entrepreneurs” program, where you will find practical tools and fundamental knowledge in the financial realm for entrepreneurs.