A budget is a plan for your money. It tells you how much you expect to sell, what you expect to spend and what should be left. Many small business owners avoid budgets because they sound complicated, but a basic one takes an hour a month and prevents most nasty surprises.

Step 1: start with what happened

Look at the last three to twelve months of actual sales and costs. If you have no records, use your bank and M-Pesa statements. Starting from reality makes your estimates better than guesses. A cashbook such as the free simple cashbook gives you the history.

Step 2: estimate sales

Estimate sales for each month, using last year's pattern and what you know about the coming months: new customers, price rises, school terms, holidays or harvest seasons. Be cautious. The sales forecast and target planner turns last year's actuals and a growth rate into a monthly forecast and target.

Step 3: list your costs

Divide them into two kinds:

  • Fixed costs, which stay the same each month: rent, salaries, insurance, loan repayments.
  • Variable costs, which move with sales: stock, packaging, transport, commission.

Remember the employer's costs of staff, not only the salary. For each employee there is NSSF and the Housing Levy on top; the staff cost and headcount budget planner adds them for every position.

Step 4: include tax

Tax is a real cost that arrives on a fixed date. Add:

Step 5: work out the result

Planned profit = planned sales less planned costs. Compare it with what you need to live on and to repay loans. If it falls short, adjust prices, costs or the sales target now, not at the end of the year. The free monthly income and expense planner sets out the plan and the actual side by side.

Step 6: compare each month

At the end of each month, enter the actual figures and look at the variances: where did you sell less or spend more than planned, and why? The budget versus actual tracker does it by line, and the 12-month cash flow forecast shows whether you will have enough cash through the year.

Common budgeting mistakes

  1. Being too optimistic about sales.
  2. Forgetting irregular costs, like annual insurance, licences and tax.
  3. Ignoring cash timing: sales on credit mean the cash arrives later.
  4. Making a budget and never looking at it again.

Keep a buffer

Plan a reserve of one to three months of fixed costs, especially if your sales are seasonal; see seasonal business planning and tax savings. A savings and sinking fund tracker helps you build it.

Share the budget

If you have staff, share the targets with them. People work better toward a number they understand.

Budgets are estimates. Revise them as real figures come in.

Common questions

How is a budget different from a forecast? A budget is your plan for sales and costs, a forecast is your best estimate of what will happen. Keep both, and compare them each month.

What should I put in the budget for tax? Estimate your tax for the year and divide it by 12 or by your payment dates, so you do not meet a large bill unprepared.

How do I cope when sales fall short? Review the budget, cut or postpone the costs you can, and speak early to suppliers and your bank.