Small business budgeting: how to build a budget, set aside what you owe, and review it

A business budget is what you plan to earn and spend over a set period, usually your financial year, broken down by month. You build it from last year's figures: list your income by source, split your costs into the ones that stay the same and the ones that move with sales, set a limit for each, and check the total against the income you expect. That takes an afternoon. What decides whether the afternoon was worth it is what happens next month, when you put the real figures beside it – and, if you run a limited company, whether you remembered that some of the cash in your account was never yours to spend.

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A budget, a forecast and management accounts are three different things

Three jobs get muddled into one word. A budget is what you plan to earn and spend. A cash flow forecast is when the money actually moves. Management accounts are what happened. Knowing which one you need saves you building the wrong thing.

The difference matters because they answer different questions, and because you can be profitable on the budget and still run out of money in week three:

Say March is a strong month: the budget shows good sales and costs well under them. The forecast shows the March invoice being paid in May, while the VAT bill goes out in April – so you are short in April, on the back of a month that went well. Our guide to building a cash flow forecast covers that side, including a template you can use. Management accounts are the third piece: the short monthly pack that tells you what really happened, which is what you compare your budget against.

You need the budget first. The other two are only as good as the plan they are measured against.

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How to build your budget, step by step

1. List your income by source

Write down every way the business brings money in: product sales, services, retainers, or anything recurring. Then put a monthly figure against each one for the year ahead.

Use last year's actual figures as the starting point rather than a target you would like to hit. If you are in your first year, use signed contracts and your pipeline, and keep the estimate deliberately low.

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2. Split your costs into fixed and variable

Fixed costs stay roughly the same whatever you sell: rent, insurance, software subscriptions, and salaries. Variable costs move with activity: materials, delivery, commission, and hourly staff.

The split matters for a practical reason. When income drops, your fixed costs are the ones you cannot do much about quickly, so the ratio between the two tells you how much room you actually have. A business that is almost all fixed cost has very little.

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3. Set a limit for each category and compare the total

Give every cost category a monthly ceiling, then add them up and put the total next to your expected income. If costs are lower, you have a planned profit. If they are higher, you have found a problem in a spreadsheet rather than in your bank account, which is the cheapest place to find one.

It is also the point where the cuts are easiest to see, because you are looking at every category at once rather than at one invoice. Our guide to reducing business costs goes through where that usually comes from.

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4. Leave room for the things you have not thought of

Equipment breaks, a customer pays late, a supplier puts prices up. Your budget needs a line for that.

There is no credible benchmark for how big it should be. You will find pages telling you to hold a fixed percentage of your expenses, and none of them can point to a UK source that supports it, because no authoritative body publishes one for small businesses generally. Size it from your own numbers instead: take your monthly fixed costs, then multiply by the longest your biggest customer has ever taken to pay you. That number is specific to your business, which is what makes it useful.

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What a limited company has to set aside before anything else

This is the part generic budgeting advice misses, because it only applies to companies. Some of the money in your business account is not the company's to spend, and a budget that treats the balance as available will be wrong every quarter.

VAT you have collected. If you are VAT registered, a sixth of what you invoice at the standard rate was never yours (£20 in every £120) – you collected it on HMRC's behalf and you will hand it over. Budget your income net of VAT, not gross, or every quarter will come as a shock. You must register once your taxable turnover passes £90,000 over a rolling 12 months, or when you expect to pass it within the next 30 days (see Register for VAT on GOV.UK). A budget that projects you through that threshold is also your warning that this is about to start.

Corporation tax on profit you have already made. The main rate is 25%, with a small profits rate of 19% if your profits are £50,000 or less and Marginal Relief in between £50,000 and £250,000 (Corporation Tax rates on GOV.UK). The trap is not the rate, it is the timing: for taxable profits up to £1.5 million, payment is due nine months and one day after your accounting period ends (Pay your Corporation Tax bill on GOV.UK). So a good year is followed, the better part of a year later, by a bill for it. Put a monthly transfer in the budget from the month the profit is earned.

Profit you may not be allowed to pay yourself. Dividends come out of profit the company has already made and already paid tax on. In HMRC's words, 'your company must not pay out more in dividends than its available profits from current and previous financial years' (Taking money out of a limited company on GOV.UK). If your budget has a monthly dividend in it, check it against that constraint before you rely on the income.

The practical move for all three is the same, and it takes one afternoon to set up: a second business account, and a standing transfer into it on the last day of each month. Money you cannot see is money you will not accidentally spend.

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Budgeting when your income is seasonal or unpredictable

If your income arrives in lumps, an annual budget divided by 12 is worse than no budget, because it tells you that you are failing for eight months and succeeding for four.

Build it from your own cycle instead:

• Go back through two or three years of sales and find the shape of your year. Most businesses have one, and it is usually more repeatable than it feels.
• Budget each month against what that month has actually done before, not against an average.
• Write more than one version. A realistic case and a bad case are enough; three is usually a way of avoiding a decision.
• Know which costs you can genuinely move if a quiet month is quieter than planned, and which you cannot.

Then let the quiet months be quiet on paper. The point of a seasonal budget is that a lean March does not trigger a panic, because you planned for a lean March. If the swings are the thing keeping you up at night, our guide to managing cash flow goes further on handling them.

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Reviewing your budget against what actually happened

A budget nobody looks at again is a document. A budget you look at every month is a management tool, and the difference is about an hour a month.

Here is the whole method. Once your figures for the month are in, put the actual number next to the budgeted number for every line. Pick a threshold you care about – a percentage or a pound amount, whichever reads more naturally for your business – and for any line that moved by more than that, write one sentence saying why. Not a report. One sentence.

That sentence is where the value is. 'Materials up because we took the Henderson job' is fine, and you move on. 'Materials up and I do not know why' is the useful one, because you have found it in month two rather than in your year-end accounts.

Our research, published in April 2026, found that only 26% of small businesses forecast their cash flow monthly, and one in five do it annually or never. The monthly habit is rare, which is most of why it is worth having. And it tends to be rarest exactly where it would help most: businesses whose income arrives in lumps, and businesses whose costs are rising faster than they can put their prices up.

Reviewing monthly is also the only thing that catches the mistakes everyone makes first time round. Revenue estimated optimistically, costs estimated from memory rather than from statements, and the irregular payments – the annual insurance renewal, the accountant's invoice – that were left out because they do not happen in a typical month. You will not spot any of those while you are building the budget. You will spot all three by March.

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When your budget shows a gap

A budget that shows you running short in month seven has done its job. You have months to work with rather than days, and that is usually the difference between choosing an option and taking the only one left.

Most of the time the answer is something you move: a cost you delay, an invoice you chase harder, a price you revisit, or a payment you agree to spread. Sometimes it is funding, and a gap you can see coming is the version of that conversation worth having. An iwoca Flexi-Loan is a business loan with flexible repayment options, so you can cover the gap your budget found and then clear it early, with no fee for doing so, once the money you were waiting for arrives. We lend to UK limited companies.