20 January 2026 · 6 min read · Bruce Thomas
A budget is the plan you set before the year starts. A forecast is your best current estimate of how the year will actually finish, updated as reality arrives. Most small businesses need both, and confuse the two.
Build it from the bottom up
Starting with last year plus ten percent produces a number nobody believes. Build revenue from the things you can actually influence: number of customers, average job value, capacity, price. Build costs from known commitments first, then variable costs as a percentage of revenue.
What a workable budget contains
- Monthly revenue by service line or product, with seasonality reflected honestly
- Direct costs modelled as a margin percentage rather than a flat guess
- Fixed overheads listed individually, including the ones that only occur once a year
- Payroll including employer's National Insurance and pension, with planned hires dated
- Tax provisions — Corporation Tax, VAT and dividends are the three most commonly forgotten
- Capital spending and loan repayments, which never appear in profit but always appear in the bank
Then convert it into cash
A profitable budget can still run out of money. Shift revenue by your actual collection period, shift costs by your payment terms, add the VAT and tax payment dates, and you have a cash forecast — which is the version that tells you whether the plan is survivable.
Review the variances, not the total
Once a month, compare actual against budget line by line and only investigate the differences that are large or persistent. A one-off timing difference is noise; three months of margin below plan is a decision.
Then update the forecast. The budget stays fixed as the benchmark; the forecast moves so it stays useful.
Keep it small enough to maintain
A budget on one page that gets reviewed twelve times is worth far more than a detailed model reviewed once. Start simple and add detail only where a decision depends on it.
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
