How to Write a Business Budget
A written budget turns a rough sense of where your business stands into numbers you can check against. It tells you whether you can afford to hire, whether a quiet month will hurt, and how much of each payment needs to go straight into a tax pot. Here’s what goes into a budget, how to build one in an afternoon, and how to keep it useful.
A budget is a plan for your money: what you expect to earn, what you expect to spend, and what should be left at the end. Most small business owners know roughly where they stand, but a written budget turns that rough sense into numbers you can check against. It tells you whether you can afford to hire, whether a quiet month will hurt, and how much of each payment needs to go straight into a tax pot. This guide covers what goes into a budget, how to build one in an afternoon, and how to keep it useful once the year is underway.
Budget, forecast and cash flow: what’s the difference?
The three terms get used interchangeably, but they do different jobs.
A target. It sets out what you plan to earn and spend over a period, usually a year, broken into months. It answers “what are we aiming for?”
A prediction. It uses what’s actually happening to estimate where you’ll end up, and gets revised as results come in. It answers “where are we heading?”
The timing of money moving in and out. A sale in March that isn’t paid until May appears in your March budget but your May bank balance. Our cash flow management guide and our guide to cash flow forecasting cover that side in detail.
You need the budget first. It gives the forecast something to be compared against, and it gives the cash flow forecast its starting assumptions.
What goes into a business budget
A budget has two halves, income and costs, and the costs split into three groups that behave differently.
- Income. Sales you expect to make, month by month, based on your pipeline, repeat customers, and any seasonal pattern. Include any other money coming in, such as grants or interest.
- Fixed costs. Things you pay whatever happens: rent, insurance, software subscriptions, loan repayments, your accountant, and salaries.
- Variable costs. Costs that rise and fall with how much you sell, such as materials, stock, subcontractors, delivery, and card fees.
- One-off and irregular costs. Equipment, a website rebuild, annual insurance renewals, professional fees. These are the ones that wreck a month if they aren’t planned for.
Tax goes in as its own line, not buried in other costs. We cover that in the section on budgeting for tax and staff costs.
Building your budget step by step
If you’ve been trading for a year or more, pull 12 months of figures from your bookkeeping software or bank statements. That’s a far better starting point than memory. If you’re new, use quotes, supplier prices, and a conservative guess at sales. Good bookkeeping makes this step quick.
Budget income from work you have booked or can reasonably expect, not from your best month. If sales vary a lot, budget on a cautious figure and treat anything above it as a bonus.
Go through your bank and card statements line by line. Small recurring payments are the ones people forget, and they add up.
An annual insurance premium goes in the month it falls due, or you can spread it evenly if you pay monthly. Either way, don’t leave it out of the months where it bites.
Budget what you plan to take out of the business, and how much you’ll set aside for tax. If you run a limited company, our guide to paying yourself as a director explains how salary and dividends fit together.
Leave a margin for the things you can’t predict. Many owners aim for at least one month of running costs in reserve, and build towards three.
A spreadsheet is enough for most small businesses. Accounting software such as Xero, QuickBooks or FreeAgent can pull in your actual figures automatically, which makes the review step much easier.
Budgeting for tax and staff costs
Two areas catch out budgets more than any others: money that belongs to HMRC, and the true cost of employing someone.
| Item | Current figure | What it means for your budget |
|---|---|---|
| VAT | 20% standard rate; registration required above £90,000 taxable turnover | If you’re registered, the VAT on your sales isn’t your income. Keep it out of your spending money. See our VAT registration guide |
| Corporation tax | 19% on profits up to £50,000; 25% above £250,000; marginal relief between | Budget a monthly sum towards the bill, which is due nine months and one day after your year end. See our corporation tax guide |
| National Living Wage | £12.71 an hour for those aged 21 and over (from April 2026) | The minimum you can pay, before employer costs. It rises each April |
| Employer National Insurance | 15% on pay above £5,000 a year per employee | Add it on top of salary. The Employment Allowance of £10,500 a year can reduce the bill if you’re eligible, so check the rules on GOV.UK |
Employers also have to pay into a workplace pension for eligible staff, at a minimum of 3% of qualifying earnings from the employer. Our guides to hiring your first employee and workplace pensions explain how that works.
A worked example
Here is a simple monthly budget for a small business expecting £8,000 of income in a typical month. The figures are illustrative only.
| Line | Type | Monthly amount |
|---|---|---|
| Expected income | Income | £8,000 |
| Workspace rent | Fixed | £600 |
| Software and subscriptions | Fixed | £150 |
| Insurance | Fixed | £80 |
| Accountant | Fixed | £120 |
| Loan repayment | Fixed | £250 |
| Marketing | Variable | £300 |
| Materials and subcontractors | Variable | £2,000 |
| Owner’s pay | Drawings or salary | £2,500 |
| Tax set-aside | Tax | £1,000 |
| Left for the buffer | £1,000 |
The costs total £7,000, which leaves £1,000 a month. That £1,000 is what pays for the irregular costs: new equipment, a renewal that lands in a quiet month, or a customer who pays late. The tax set-aside here is an assumed figure, and the right amount depends on your profit and structure, so agree it with your accountant.
The point of a table like this isn’t to hit every figure exactly. It’s to see straight away which line to cut or which income to chase if the numbers don’t add up.
Reviewing and adjusting your budget
A budget that sits in a folder is no use. Once a month, set your actual figures beside the budget and look at the gaps.
- Compare income and costs line by line. Note anything more than about 10% out in either direction, and find out why.
- Separate timing from real change. A bill that arrived a month early is a timing difference. A supplier putting prices up is a real change that needs the budget adjusting.
- Update the forecast. If three months of sales are running below target, revise the next nine rather than hoping the gap closes itself.
- Check against your wider targets. A budget should serve your goals. Our guides to setting business goals and KPIs for small businesses show how to link the two.
- Do a bigger review once a year. Set next year’s budget from this year’s actuals, not from this year’s budget.
Common mistakes
A cautious average is safer, and avoids running short when income dips.
Or treating VAT collected as spendable income.
Annual renewals, equipment replacement, and professional fees all fall in single months.
The business looks profitable on paper while you’re living off savings.
It turns into a record of what you hoped would happen.
Counting salary only misses employer National Insurance and pension contributions.
Useful resources
- GOV.UK — National Minimum Wage and National Living Wage rates — gov.uk/national-minimum-wage-rates
- GOV.UK — employer rates and thresholds for 2026 to 2027 — gov.uk/guidance/rates-and-thresholds-for-employers-2026-to-2027
- GOV.UK — when to register for VAT — gov.uk/vat-registration/when-to-register
- Our cash flow management guide — keeping money moving through the business
- Our cash flow forecasting guide — seeing a funding gap before it arrives
- Our bookkeeping basics guide — the records a budget depends on
More guides for UK small business owners
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