Building next year's budget for a small company
Many small companies do not have a budget because it sounds like a job for a finance department. In practice, a useful budget fits on one screen: fifteen or twenty lines, twelve months, and a clear idea of what the company expects to earn and spend.
What a budget is for
A budget is the company's plan for the year, written down before the year starts. It answers three questions: how much we expect to earn, what we are prepared to spend, and what should be left over. Its real value comes later, when actual numbers arrive and you can see where reality differs from the plan and decide what to do about it.
A budget is not a forecast. The budget is fixed once approved; a forecast is updated as the year goes on and shows where you are heading now. You need both, but you build the budget first.
What to gather before you start
- Last year's actual income and costs by month and by category, from your accounting or management records.
- Contracts that continue next year: rent, leases, subscriptions, service agreements, loans.
- The current payroll and any planned hires, raises or departures.
- Your sales plans: products, key customers, price changes, seasonality.
- Known one-off items: equipment, a website, a trade fair, a move.
How to build the budget, step by step
- Lay out last year's actuals by month in 15 to 20 categories. More lines make the budget harder to maintain without making it more accurate.
- Mark each cost as fixed, variable or mixed. Fixed costs stay the same whatever you sell; variable costs grow with sales.
- Plan revenue bottom-up: by product line or customer group, month by month, using last year's seasonality and the changes you actually expect, such as new customers or price increases.
- Set variable costs as a percentage of the planned revenue, based on last year's ratios, and adjust for known changes in purchase prices.
- List fixed costs line by line: salaries including planned hires from their start month, rent, subscriptions, insurance and other contracts, with known increases.
- Add one-off items in the month they are expected, and include loan repayments and tax payments if you budget cash as well as profit.
- Calculate the result per month and for the year, and build a pessimistic version, for example with flat revenue, to see what you would cut first.
- Agree the budget with the people responsible for each area, approve one version and do not edit it afterwards; record changes as a new version.
- Schedule a monthly review of actuals against the budget from the first month.
Worked example (illustrative numbers)
A small service company with seven people had 540,000 euros of revenue last year. For next year it plans 10 percent growth, to 594,000. Variable costs, mainly subcontractors and materials, were 35 percent of revenue, so the budget sets them at 207,900.
Fixed costs: current salaries of 240,000, plus one new hire from April at 3,500 a month for nine months, which is 31,500; rent of 36,000; software and subscriptions of 9,600; other fixed costs of 24,000. Total fixed costs are 341,100. One-off: new equipment for 15,000 in March.
The result is 594,000 minus 207,900, minus 341,100, minus 15,000, which leaves 30,000. In the pessimistic version revenue stays at 540,000, variable costs fall to 189,000 and the result becomes a loss of 5,100. The owner decides in advance: if revenue in the first quarter tracks the pessimistic version, the new hire moves from April to July. That saves 10,500 and brings the pessimistic result back to 5,400. The decision is written into the budget notes, so nobody has to argue about it in April.
Top-down or bottom-up
Top-down means the owner sets a target, such as 10 percent growth, and the numbers are shaped to fit it. Bottom-up means each area estimates what it can realistically sell or needs to spend, and the totals follow. Small companies usually do best with a mix: build bottom-up, compare with the target, and discuss the gap openly instead of inflating the sales line until it matches.
How this is done in OrgLines
OrgLines Finance is management finance: money, payments, plans and forecasts tied to operations, while statutory accounting can stay with your accountant. For the budget, you start by creating the financial year: one action creates 12 months, 4 quarters and the year. You choose a reporting currency, list income and expense categories and mark each expense as fixed, variable or mixed. Dimensions such as business line, department or project split amounts further.
The budget is built as a draft with lines per category and then approved. The approved version is frozen and becomes the plan you compare against; a change creates a new version, so the answer to 'but we planned differently' is always there. Recurring obligations such as rent and subscriptions, described once, appear in the forecast, and a what-if scenario lets you test a pessimistic case as an overlay without touching the approved budget or real invoices.
Common mistakes
- Taking last year's total and adding 10 percent to every line.
- Spreading revenue evenly over twelve months in a seasonal business.
- Forgetting planned hires, annual price increases in contracts or one-off payments.
- Too many lines, so the budget is abandoned by March.
- Editing the approved budget during the year, which leaves nothing to compare against.
- Mixing amounts with and without VAT. If your company is VAT-registered, budget revenue and costs net of VAT and check the details with your accountant.
Checklist
- Last year's actuals by month and category.
- 15 to 20 categories, each marked fixed, variable or mixed.
- Revenue planned by month with seasonality.
- Fixed costs listed line by line, including planned hires.
- One-off items placed in their month.
- Pessimistic version with decisions agreed in advance.
- One approved version and a monthly review date.