Budgeting for Small Businesses

A budget sounds like something for corporates — spreadsheets, committees, a finance team. For a small business it is simpler and far more useful: a written-down expectation of what the year ahead should look like, so that when reality differs, you notice while there is still time to react. The businesses that get value from budgets are rarely the ones with the fanciest models. They are the ones that put the budget beside actuals every month.

Start from last year's actuals, not a blank page

The fastest honest budget starts with what actually happened. Export last year's profit and loss by month from Xero or MYOB and use it as the skeleton. Last year already knows your seasonality, your real wage bill, and the subscriptions you forgot you pay for. Then adjust deliberately: a known price change, a hire you have committed to, a contract that is ending, a rent review you have been notified of. Every line that differs from last year should have a reason you can say out loud. Budgets invented from scratch tend to describe the business the owner wishes they had.

Separate fixed from variable

Costs behave differently, and a useful budget respects that. Fixed costs — rent, insurance, software, base wages — arrive regardless of how much you sell, so budget them as the dollar amounts you already know. Variable costs — materials, subcontractors, merchant fees — should move roughly in line with revenue, so budget them as a proportion of sales instead. The split earns its keep later: when actuals come in over budget, it tells you immediately whether the overrun is a volume story or a cost-control story, and those call for opposite responses.

Build in the money that is not yours

The most common small business budgeting mistake is treating everything that lands in the bank as spendable. Part of every dollar that arrives is already spoken for — GST collected on sales, PAYG withholding on wages, super accruing each pay run, and income tax on the profit you are budgeting to make. Give each of these an explicit line in the budget and move the money aside as it accrues, so the operating picture only ever shows what is genuinely available. The right amounts depend on your margins, payroll and structure — check the current ATO rates and work from your own figures rather than borrowing someone else's rule of thumb.

Budget versus actual, every month

A budget you never reopen is a wish. Each month, put actuals beside budget and look at the three biggest variances — not every line, just the biggest three. Ask of each: is it timing, a one-off, or a trend? An expense that landed a month early needs nothing. A one-off needs a note. Only a trend needs a decision, and finding trends while they are two months old is the entire point of the exercise. Both Xero and MYOB can store the budget and produce the comparison report automatically, which removes the last excuse.

What we commonly see go wrong

• Budgeting revenue with optimism and costs with amnesia — sales rise sharply, costs stay flat, and the gap is declared as profit.
• No GST, tax or super lines, so the budget shows cash the business never really had, and the shortfall surfaces at BAS time.
• A budget built once in July and never compared to actuals again.
• Chasing every small variance in the first month and exhausting the habit by the second.
• Rebuilding the budget whenever reality disagrees with it, which erases the very information a variance carries.

A worked example

As an illustration: a café owner budgets the new year by copying last year's monthly actuals, then makes three deliberate changes — a modest price rise from 1st October, one extra staff member for the summer quarter, and a higher insurance line taken straight from the renewal notice. The budget shows a thin but positive margin. The first two monthly reviews track close to plan; in the third, wages run well over with no matching lift in revenue. Because fixed and variable costs were budgeted separately, the owner can see it is a rostering problem, not a sales problem — and fixes the roster instead of panicking about marketing.

When to get help

If the blank page keeps winning, a bookkeeper or accountant can turn last year's file into a working first draft in a single short session, and the monthly comparison into a report that arrives without being asked for. And if the budget keeps disagreeing with the bank balance, the missing piece is almost always the tax and super lines — worth getting right before the next BAS makes the point less politely.

Do I need special software to build a budget?

No. Xero and MYOB both include budget features that compare actuals automatically, and a spreadsheet built from last year's monthly profit and loss works perfectly well to start. The monthly comparison habit matters far more than the tool.

How much should I set aside for GST, tax and super?

It depends on your margin, structure and payroll — there is no universal percentage that is safe to borrow. Check the current ATO rates, calculate from your own figures, and move the money aside as it accrues rather than at the deadline.

Should I change the budget during the year if it turns out to be wrong?

Keep the original budget fixed so variances stay meaningful, and handle genuine changes through a reforecast that sits alongside it. Rewriting the budget to match reality removes the early-warning value it exists to provide.