How to Create A Financial Budget for a Small Business

The financial budget is one part of a business's master budget. The second part of the firm’s master budget is the operating budget. The master budget is the financial portion of the business's strategic plan for the near future. The strategic plan for the business maps out the firm's planned financial activities for the next five years.

Purpose of the Financial Budget

The purpose of the financial budget is to estimate the firm’s cash budget, capital expenditures, and balance sheet line items like assets, liabilities, and owner’s investment. The financial budget is the last budget to be developed by the firm every year since all other budgets, like the individual budgets in the operating budget, are necessary first. The financial budget helps the firm by allowing it to calculate net profit when the budget process is complete.

Capital Expenditures Budget

The capital expenditures budget is the first budget of these three budgets to be prepared within the framework of the financial budget. The information from this budget is needed for both the cash budget and the budgeted balance sheet.

Capital expenditures are fixed asset expenditures. Fixed assets are equipment or facilities needed for a business to operate. These expenditures also include maintenance for these items. While there are businesses that purchase larger amounts of fixed assets, most smaller businesses do not.

Small businesses tend to be more conservative in their capital expenditures since these types of purchases can be very costly. Many do not own the facilities they operate in, reducing capital expenditures.

While an expenditures plan for maintenance of the equipment is likely, a smaller business may lease, rather than own, their equipment. Consider depreciation and standard lifetimes of your equipment when designing your capital budget if you own your plant and equipment.

Here is an example of a simple capital expenditures budget for a small business:

Cash Budget

The cash budget is a short-term, internal-only financial document usually prepared on a monthly basis. It is a tool that helps the business manage its net working capital.

Business firms, especially small ones, cannot operate without cash. Cash is king in the small business firm. The cash budget is a very important tool that a business firm should rely on. 

The cash budget shows the firm how much cash is either available to the firm at the end of each month or how much the firm will have to borrow. The cash budget accomplishes this by comparing the cash receipts the firm takes in each month against the cash purchases it makes.

Firms will usually develop a forecasted monthly cash budget for a one-year time period. If the cash budget shows an increase in net working capital, the firm may use that increase to reduce operating costs; by repaying borrowed money, for example. If the cash budget shows a decrease in net working capital, you may need to find some way of increasing available cash; by drawing on a line of credit, taking out a bank loan or by factoring. 

Here is an example of a simple cash budget:

In this example, the ending available cash ($20,000) exceeds the ending cash used ($18,000) by $2,000, which represents the net cash available and the beginning cash position for the following month.

Budgeted Balance Sheet

Both the capital expenditures budget and the cash budget must be completed before the budgeted balance sheet can be developed. The budgeted balance sheet begins with the current balance sheet. It then takes the data from the other budgets that have been developed, such as the cash budget and the capital expenditures budget. It also takes the data from the firm’s operating budget.

That data includes the firm’s sales forecast—the production budget which includes the direct materials purchased budget, the direct labor budget, and the overhead budget; the ending finished goods inventory budget; the cost of goods sold budget; and the selling and administrative budget. After you combine this information and the information from the financial budget, you can develop the budgeted balance sheet.