How to Build an Annual Budget for Your Business

An annual budget isn’t just a spreadsheet your accountant asks for.
It’s your financial game plan for the next 12 months.

A good budget helps you:

• Plan revenue and expenses

• See if your goals are realistic

• Decide when to hire, invest, or cut costs

• Avoid “surprise” cash crunches

Let’s walk through how to build a practical, business-focused annual budget—one that works whether you’re a solo operator or running a small team.

We’ll cover:

1. What an annual budget really is

2. The numbers you need before you start

3. How to project revenue by month

4. How to plan expenses (fixed, variable, and strategic)

5. How to factor in taxes, profit, and owner distributions without making them the star of the show

6. How to review and adjust your budget throughout the year

1. What an annual budget really is (for a business)

Think of your annual budget as:

A 12-month forecast of revenue, expenses, and profit that guides your decisions.

It’s not about guessing perfectly.
It’s about having a baseline plan so you can compare:

• What you expected
  vs.

• What actually happened

and then course-correct.

A strong business budget:

• Aligns with your growth plans (new hires, locations, services)

• Sets spending limits for key areas (marketing, payroll, tools)

• Keeps leadership on the same page about priorities

2. Gather your financial “starting point”

Before you plan the future, get a clear picture of the past.

Pull the last 12 months (or as many as you have) of:

• Profit & Loss (Income Statement)

• Balance Sheet (for context on debt, assets, cash)

• Bank and credit card statements

• Any payroll or contractor reports

From this, calculate:

• Total revenue for the year

• Revenue by stream (services, products, retainers, etc.)

• Major expense categories, such as:

  • Payroll & contractors

  • Rent / facilities

  • Software & subscriptions

  • Marketing & advertising

  • Operations (utilities, office supplies)

  • Professional services (legal, accounting)

You’re looking for patterns:

• Seasonality (busy vs slow months)

• Expenses that are increasing

• Areas where spending doesn’t match results

This becomes the baseline for your new budget.

3. Map out revenue for the next 12 months

Start with how your business actually makes money.

Step 1: List your revenue streams

Examples:

• Project-based services (e.g., consulting, design projects, build-outs)

• Retainers or recurring contracts

• Subscription or SaaS revenue

• Product sales (physical or digital)

• Training, workshops, or courses

Step 2: Estimate volume and pricing

For each stream, estimate by month or quarter:

• Average price

• Number of units (projects, clients, subscriptions, orders)

Example:

Then, layer in seasonality:

• Do Q2 and Q3 usually outperform Q1?

• Are there predictable slow months (holidays, industry cycles)?

Your revenue plan should be ambitious but grounded in what has actually happened in your business.

4. Plan your expenses: fixed, variable, and strategic

Next, decide what it will cost to operate and grow your business.

Fixed expenses (baseline)

These don’t change much month to month:

• Rent or office / coworking space

• Software subscriptions

• Insurance

• Salaried payroll

• Loan payments

• Internet, phone

Use your past year as a guide and plug in monthly amounts across the year.

Variable expenses (scale with activity)

These go up and down with revenue or projects:

• Contractor and hourly labor costs

• Cost of goods sold (materials, printing, packaging)

• Payment processing fees

• Shipping

• Usage-based software tools

Estimate these as:

• A percentage of revenue, or

• A per-unit cost tied to your revenue estimates

Strategic expenses (growth and improvement)

These are intentional investments to move the business forward:

• Increased marketing or ad spend

• Hiring or adding key roles

• Training and development

• New equipment or technology

• Expansion costs (new location, new service line)

Build them into specific months where you expect to take action:

Example: “Increase ad spend by 50% starting in May”
or “Budget for new hire onboarding costs in Q3.”

This is where your budget becomes a strategy tool, not just a cost list.

5. Plan for taxes, profit, and owner distributions

The budget still needs to account for:

• Taxes

• Profit (money the business keeps)

• Owner distributions (if applicable)

The key is to frame these as business requirements rather than personal goals.

Taxes

Work with your tax pro or use a safe estimate to:

• Build in estimated income tax and payroll tax obligations

• Decide on a target percentage of profit or revenue to set aside regularly

Add a line in your budget for “Estimated Tax Reserves” each month based on your projections.
This keeps taxes from becoming an ugly surprise.

Profit

Decide what level of profit the business should aim for, such as:

• 10–20% net profit margin as a general goal (varies by industry)

That means:

Profit = Revenue – All expenses (including payroll, including owners on payroll if applicable)

Your budget should be built so that:

• You’re not spending every dollar that comes in

• There is planned surplus to build reserves, reduce debt, or fund future investments

Owner distributions (briefly)

If you or other owners take distributions:

• Add a planned distributions line to your budget (monthly or quarterly)

• Treat it as one of the uses of profit, not the main driver of the budget

This keeps the focus where you want it:
on building a strong, healthy business that can support its owners sustainably.

6. Build a 12-month budget layout

Now you’re ready to put it all into a single view.

Create a spreadsheet (or use budgeting software) with:

• Columns: January through December

• Rows:

  • Revenue (broken out by stream)

  • Total Revenue

  • Direct Costs / Cost of Goods Sold

  • Gross Profit

  • Operating Expenses (grouped logically)

  • Strategic / one-time expenses

  • Estimated Taxes

  • Net Profit

  • Optional: Owner distributions and Ending Cash Projections

A simple structure might look like:

                 Jan   Feb   Mar   ...   Dec   Total
Revenue
  Service A
  Service B
  Products
Total Revenue

Direct Costs
  Contractors
  Materials
Gross Profit

Operating Expenses
  Rent
  Software
  Marketing
  Payroll
  Utilities
  Insurance
  Other Ops
Total Operating Expenses

Strategic Expenses
  New hire costs
  Extra ad campaigns
  Equipment

Estimated Taxes
Net Profit
(Optional) Owner Distributions

This layout lets you quickly see:

• Which months are tight

• When big costs hit

• Whether your planned profit margin holds over the year

7. Stress-test your budget

Once your first version is built, test it:

• Scenario 1: Revenue is 20% lower.

  • Can you still cover core expenses?

  • Do you need a plan for cutting discretionary spend?

• Scenario 2: Costs are 10–15% higher.

  • What gets squeezed—profit, tax reserves, or planned investments?

• Scenario 3: Growth exceeds expectations.

  • What will you need to invest in (staffing, tools, systems) to deliver well?

You don’t need dozens of scenarios—just enough to see how fragile or resilient your plan is.

8. Make your budget a monthly management tool

A budget only helps if you use it.

Set a simple monthly review rhythm:

1. Compare actuals vs budget for revenue and major expenses.

2. Note any big variances (positive or negative).

3. Decide whether to:

   • Adjust future months’ budget, or

   • Take corrective action (cut costs, delay a hire, increase marketing, etc.).

Quarterly, zoom out:

• Are you on track with revenue, profit, and cash?

• Do you need to shift strategy (pricing, offers, staffing) for the rest of the year?

Your budget should be a living document—updated as you learn more, not a rigid forecast you “failed” if reality doesn’t match.

9. When to bring in help with budgeting

Building an annual budget is especially valuable when:

• You’re planning to hire, expand, or invest in new services

• Your revenue is growing, but you can’t see where the money goes

• Leadership needs a shared set of financial expectations for the year

• You want to better manage cash flow, debt, and profitability

External support is useful when:

• Your data is messy and you need help organizing it

• You want someone to translate the numbers into clear decisions

• You don’t want to manage a complex spreadsheet on your own

CTA: Let The Financial Smith help forge your annual business budget 🔨

At The Financial Smith, we specialize in turning scattered numbers into clear, practical annual budgets for businesses.

We help you:

• Use your real financial data (even if it’s messy) as a starting point

• Build a 12-month revenue and expense plan aligned with your business goals

• Plan for taxes, profit, and cash reserves in a way that supports long-term stability

• Stress-test your budget so you know how hiring, investments, or downturns would impact you

• Walk away with a simple, understandable tool you can revisit each month

If you’d like a budget that does more than live in a spreadsheet:

👉 Book an annual budget planning session with The Financial Smith.
We’ll work with your numbers and your goals to forge a realistic, data-backed plan for the year—one you can actually use to run your business.