Want to create a realistic budget for the year ahead? Our guide to creating a budget shows you how to get started, ways you can use Xero accounting software and ultimately how to set your small business finances up for success.

The Basics: Planning Your Budget

There are five basic steps we need to take in order to plan your budget for the year ahead.

1. Setting clear financial goals
2. Reviewing historical data
3. Identifying fixed and variable costs
4. Forecasting revenue
5. Creating a profit and loss forecast

We’ll start with these steps before we get into how to create the budget in Xero.

First, setting clear financial goals.

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01 Set Clear Financial Goals

As a small business owner, you may have figures in your head that you’re looking to achieve. You likely have financial aspirations that would make a positive impact on your personal circumstances.

Questions we might ask ourselves include

• What are my revenue targets?
• What are my fixed and variable costs?
• What investments or growth opportunities will I pursue (e.g., hiring, new products, marketing campaigns)?
• What cash flow targets do I need to meet?

Answering these core financial questions will provide a roadmap to base your budget on – an essential starting point.

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02 Review Historical Data

Next we want to look at your business’ financial performance over the last 12 months. Your accounting software or adviser will be able to provide this information.

What you’re looking for is:

• Revenue Trends: How has your revenue fluctuated month by month? Which months were peak months, and which were slower?
• Segment of your clients and types of services you offer: What profit margins do you make on each? Could you do more work with the clients who make you higher profits? Could you improve the profits for the others?
• Expenses: What are your major cost categories (e.g., rent, utilities, wages, marketing)? Are there areas where you overspent or underspent?
• Cash Flow: Look at your cash inflows and outflows. Are there seasonal variations?

This data should provide a valuable snapshot of your business, aid your strategic thinking and help you forecast more accurately.

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03 Identify Fixed And Variable Costs

We should be clear about the difference between fixed and variable costs.

In summary:

• Fixed Costs: These are consistent and predictable, like rent, salaries, and insurance.
• Variable Costs: These fluctuate depending on sales, production, or business activity, such as raw materials, utilities, or marketing spend.

This makes it easier to forecast costs that remain fairly consistent versus those that will fluctuate.

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04 Forecast Revenue

Anyone can become an ‘Excel millionaire’, but as a small business owner you will likely have a more realistic expectation of what you’ll be able to achieve. Look at your recent performance, and ask yourself what might change in the coming year that could impact revenue.

Factors that you might consider here include

• Expected increases in sales (if launching new products or services)
• Price changes
• Potential new customers or markets
• Economic conditions or industry-specific trends that might impact demand

It’s OK to be optimistic (great businesses are founded on visionary growth plans, after all!) Just make sure there’s some justification for your forecast.

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05 Create a Profit and Loss Forecast

Now you can pull everything together into a P&L forecast that will provide you with a budget.

Your profit and loss forecast will include:

• Sales Revenue
• Cost of Goods Sold (COGS)
• Operating Expenses: Staff costs, marketing, office expenses, utilities, etc.
• Net Profit

In one document, you now have a clear view of expected profitability with the ability to identify any cash flow gaps.

How To Use Xero For Small Business Budgeting

To make sure your budget becomes a key focus for your business growth, we strongly recommend building it directly within your accounting package.

With Xero you can build your budget within the software, allowing you to track performance throughout the year. It’s a real benefit that makes Xero an excellent choice for small businesses.

Here are the steps to follow:

01 Prepare Your Xero

• Login to Xero
• Make sure your Xero account is set up and up to date with your most recent financial data

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02 Navigate to the Budget Area

• Go to the “Accounting” menu
• Select “Reports”
• Under the “Budgeting” section, choose “Budgets”

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03 Create a New Budget

• Click “New Budget” to start creating your budget
• Choose the financial year (ie. 2025) and set the start and end dates for the budget period

Note: Xero allows you to create a monthly or yearly budget, depending on your preference. Most businesses prefer monthly for more granular tracking. You also should consider adding data for 24 months ahead as it allows you to look 12 months ahead all the way through the year and you can update the budget as required.

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04 Enter Revenue and Expense Figures

• Start inputting your forecasted income and expenses in the appropriate categories
• This will include:
  • Sales Revenue
  • Operating Expenses (broken down by categories like salaries, rent, utilities, marketing, etc.)
  • COGS
  • Any other anticipated costs like taxes, loans, etc.

Note: Xero may pre-fill some categories based on your historical data or accounts setup, so ensure these align with your expectations for 2025.

Tip: You can also download the budget into Excel and reload the updated data.

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05 Adjust for Seasonality or Growth

• If your business experiences fluctuations in revenue or expenses based on seasons, adjust your monthly figures accordingly. For example, if you expect higher sales in Q4 due to a holiday season, reflect that in your budget.
• Adjust for known or like price rises.

Great! Now your budget lives within Xero.

We’re ready for the final step – using your budget throughout the year.

Staying On Track: Reviews, Data & Decisions

Now we’re prepared, we can use your budget throughout the year to keep on track and ensure you hit your financial goals.

The three steps we need here are:

1. Track and adjust your budget in Xero
2. Use cashflow forecasting tools if needed
3. Review regularly and make decisions

Let’s look at those.

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01 Track And Adjust Your Budget In Xero

Once your budget is in place, it’s important to regularly track your actual performance against your budget. Xero makes it easy to do this.

• Monitor Your Actual vs. Budgeted Figures: Go to “Reports” and choose “Budget Variance” to compare your actual performance against your forecasted budget. This helps you see where you’re on track and where you might need to adjust.
• Make Adjustments as Needed: If your business experiences unexpected changes (e.g., a drop in revenue, unplanned expenses), update your budget in Xero to reflect the new reality. It’s important to adjust throughout the year to stay aligned with actual performance.

Note: If this feels like too much admin, perhaps our bookkeeping service would be worth exploring.

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02 Use Xero’s Forecasting Tools

Xero also has built-in cash flow forecasting tools to help you predict future cash flow based on your budget and expected inflows and outflows. This can be especially helpful for managing working capital.

It’s ‘optional’, but definitely recommended.

Or if you required a more granular budget or cashflow forecasting than Xero, there are lots of them on the market and we can help you select and implement.

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03 Review Regularly And Make Data-Driven Decisions

This is incredibly important, but something that many small businesses fail to do properly.

Budgeting is not a ‘once-a-year’ activity. If you’re determined to achieve your financial goals (for you business and yourself), this is something that needs regular review.

We recommend:

• Monthly or Quarterly Reviews: Regularly review your budget and financial reports to ensure you’re on track. Look for discrepancies and adjust your spending, revenue goals, or cash flow projections.
• Use Reports to Guide Decisions: Xero’s budgeting tools are designed to provide you with insight into where your business is heading, so use this data to make informed decisions on areas to cut costs, increase investment, or refine your strategy.

You’ll quickly discover how valuable these sessions are, and start to feel much more confident about how to evolve and grow your business.

Ready? Let’s Get Started

Hopefully you’re feeling ready to get started with budgeting for your small business? This guide has shown you how to prepare for, create and use a budget to achieve your financial goals.

Budget setting doesn’t have to be scary – every small business owner should feel empowered to create a budget that really helps them achieve results from their business.