Advice for Budgeting Formulas

by Sam Ashe-Edmunds

Budgets that simply record expenses and revenues don’t help small businesses plan ahead, adjust to financial challenges or take advantage of market opportunities. The most effective budgets are flexible and updated on a regular basis. Set up a budget to do more than force you to meet spending limits or tell you what happened last month.

Create Three Budgets

Your business can perform as expected, it might experience poor sales or it might find itself with unexpected revenues. After you create a realistic budget, create one that assumes slow sales and another that forecasts significant growth. These last two budgets will help guide you through unexpected periods, rather than leaving you to realize you’re in trouble when it’s too late, or to miss opportunities, or react slowly to either scenario. A low-sales budget allows you to adjust your spending in advance. A high-sales budget will give you parameters for increasing marketing expenditures or staffing, paying down debt more rapidly or setting aside enough money to pay increased taxes.

Divide Your Expenses

When creating your budget formula, classify expenses as fixed and variable. Fixed expenses don’t change, regardless of your sales or revenue. Examples of fixed expenses include rent or mortgage, salaries and insurance premiums. You can include recurring expenses as fixed if they will occur each month or quarter and you can average them accurately. For example, if you can project your annual electricity and phone expense, you can average your monthly cost for each and include those in your fixed expenses category. Variable expenses change regularly. If you manufacture a product, your raw material costs will fluctuate with your sales. Commissions will vary with sales, as will your sales tax.

Marketing Expenses

Some companies tie their marketing spending to sales. Employ this strategy by making your marketing expense a percentage of sales, creating a formula in your budget spreadsheet that sets your upcoming monthly or quarterly marketing budget based on last month’s or quarter’s sales.


Track your performance by creating columns in your budget that state your projected income and expenses, your actual income and expenses as they occur each month, and your average income and expenses based on your real-time performance. For example, you might forecast monthly sales of $150,000. In the monthly columns of your budget, you'd put the actual sales each month. In the projected sales column at the end of your spreadsheet, you'd divide your total sales by the number of months that have passed so far. If you had sales of $125,000 in January, $95,000 in February and $105,000 in March, your real-time average monthly sales would be approximately $108,000. After one quarter, you can compare your real-time performance to your projections and decide if you need to adjust your spending.

Monthly Net

At the bottom of each monthly income column, include a total for your income and expenses. Create another line below those totals that subtracts your expenses from your income to track your monthly net income or loss. This allows you to see if you’re making or losing money and to check your cashflow situation. If your sales are strong each month but you don’t compare your total expenses to income, you may not realize your strong sales aren’t enough to keep you profitable.

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