Many SMEs reach two or three million in revenue without ever having built an annual budget. It works — until the year a hiring decision, an investment and a weak month all coincide, and nobody had any way of knowing they would.
A first budget doesn't need to be sophisticated. It needs to exist, and to be compared against reality every month.
Start from what's already known
The base is last year, not a blank sheet. Three blocks:
- Revenue, split between what's recurring and contracted and what depends on new sales. This is the single most important split, because the first part is nearly certain and the second is a bet.
- Direct costs, tied to volume.
- Overhead, which exists regardless of sales — staff, premises, insurance, software.
The mistake of starting from desired revenue
The temptation is to set the revenue you want to hit and build costs from there. The result is a document that's already out of step with reality on day one, and gets abandoned by March.
The reverse works better: start from contracted, predictable revenue, add the overhead that already exists, and see how much still needs to be sold to break even. That number — how much is left to sell to cover overhead — is usually the single most useful thing to come out of the whole exercise.
Spread it monthly, don't just divide by twelve
An annual budget split into twelve equal months is useless at a company with seasonality. June carries the holiday bonus, August has less activity, November or December carry the Christmas bonus, May and July carry annual tax obligations.
A properly monthly-spread budget shows, before the year even starts, which months will run short of cash — which is exactly the information that lets you act ahead of time instead of reacting.
Three scenarios, not one
It's worth building three versions of the revenue line: a conservative one, with only what's already contracted; a likely one; and an optimistic one. Overhead stays the same across all three.
The useful exercise is looking at the conservative scenario and asking: if this is what happens, can the company handle it? If the answer is no, there's a decision to make now, not in September.
Review it, don't rewrite it
A budget that's never compared against actuals is a dead document. A simple monthly comparison — budgeted against actual, explaining only variances above 10% — keeps the document alive without eating up time.
The goal is never to get it exactly right. It's to notice early which direction you're drifting, and decide whether it matters.