Start with what you expect to bring in

A budget is only as good as the income figure you build it on. It's tempting to forecast your best-case sales, but that's the quickest way to run out of cash. Instead, start with a cautious estimate of what you'll actually bring in each month.

If you're selling products or services, work out how many sales you need per day or week, and what the average customer spends. For example, a dog groomer charging £40 per appointment and completing four appointments a day, five days a week, is looking at £800 a week, or around £3,500 a month. But January and February are often quieter, so budget for the slower months and treat busier ones as a cushion.

If you genuinely can't predict income yet, use a range. Write down a low figure and a high figure, then build your budget on the low one. Anything above that is a bonus, not a plan.

Pin down your fixed costs first

Fixed costs are the bills you'll pay whether you sell anything or not. They're the foundation of your budget because they don't move when trading gets tough.

List everything you've committed to:

• Rent, business rates and service charges
• Insurance, including public liability and contents cover
• Accountancy and bookkeeping fees
• Software subscriptions, phone and broadband
• Loan repayments, lease payments and hire purchase
• Professional memberships or licence fees

Add them up and subtract the total from your cautious income figure. What's left has to cover your variable costs, tax and, eventually, your own pay. If fixed costs swallow your cautious income entirely, you've got a problem worth solving now rather than six months in.

Build in flexible spending categories

This is where a realistic budget separates itself from a wish list. Most new ventures have costs that rise and fall with sales, so set them as percentages of income rather than fixed amounts.

For a retail or product business, that might mean stock at 35% of sales, packaging at 3%, payment processing at 1.5%, and marketing at 5%. If income drops by a fifth, those costs fall with it. You're not stuck paying for stock you can't shift or ads that aren't converting.

Service businesses can do the same with subcontractor costs, travel and software usage. Then add two lines that many new owners forget:

• A contingency of 5–10% of total costs. Something always costs more than expected — a repair, a replacement, a price rise.
• A small owner's draw, even if it's modest. Paying yourself nothing for a year isn't a business model, it's burnout with extra steps.

Don't forget the costs that catch new businesses out

Some expenses don't show up in the first month but hit hard later. Put them in your budget now, even as estimates.

• Tax and National Insurance. If you're a sole trader, set aside a percentage of profit for Self Assessment, including payments on account. Limited companies need to plan for Corporation Tax and PAYE if they employ staff.
• VAT. Once your turnover crosses the threshold, you'll need to charge and account for VAT. Budget for the admin time and the cash flow effect, especially if you're on standard VAT accounting.
• One-off and annual costs. Deposits, equipment, initial stock, legal fees, website builds and renewals. Divide annual costs by twelve so they don't ambush you.
• Bad debts and refunds. If you invoice other businesses, assume a small percentage won't pay on time, or at all.

Review and adjust as trading conditions change

A budget isn't a sculpture. It's a working document, and the whole point of flexible categories is that you can adapt when things shift.

Set a monthly routine: compare what you actually earned and spent against your forecast, and write down the reasons for any big gaps. If income comes in 15% below plan for two months running, you need a trigger for action. Perhaps that means pausing a marketing channel, renegotiating a subscription, or delaying a hire.

Update your full forecast every quarter, and keep it simple. A spreadsheet with income, fixed costs, variable costs and a cash balance is enough for most new ventures. The goal isn't a perfect prediction — it's knowing what you'll do when reality turns out differently.

If you're unsure whether your numbers stack up, talk to your accountant before you need to, not after. A short conversation early on is far cheaper than a cash flow crisis later.