A useful first budget fits on one screen. Take the last three months of your profit and loss statement, average each main line, adjust for anything you already know is changing, and keep the result to six to eight lines. After each month closes, put the actual figures next to the budget and look closely only at the lines that are well away from it. For each of those, write down one action, who will take it and by when.
This is a spreadsheet routine. All amounts in this article exclude GST.
Build the first budget from three months of history
Start from figures you already have rather than from targets.
- Take the last three months of your P&L. Your accountant can send these if you do not have them.
- Average each line. Add the three months and divide by three. This gives a starting figure based on what actually happened. If those months were unusually busy or quiet for your business, say so in a note and adjust the line.
- Adjust for what you already know. A new hire starting next month, a rent increase in the new agreement, a client contract that has ended, a software subscription you have just added. Change the line and write a one-line note saying why.
- Do not copy figures from other businesses. Your budget should reflect your own costs and clients.
Once the budget is set for the month, leave it alone. If you change the budget every time the actuals move, the comparison stops telling you anything. What you learn from one month goes into next month's budget.
Keep it to six to eight lines
For a small service business, these lines are a good starting point:
- income
- salaries
- freelancers and other direct costs of client work
- rent
- software and subscriptions
- marketing
- everything else, as one line
Then a profit line at the bottom: income minus all the cost lines. If one cost is large or changeable for your business, give it its own line; if a line is always small, fold it into "everything else". If your accountant prepares an MIS pack for you, this is a simpler version of a budget-vs-actual page.
The monthly comparison
After the month is closed and your accountant has finalised the figures, add two columns to the budget: Actual and Difference.
How to read the Difference column: + means the actual was more than the budget and − means it was less, for income and costs alike. Whether that is good or bad news depends on the line: more income than planned is good, more cost than planned is not. Say which in words when you discuss it, rather than relying on the sign.
Which lines to look at, and one action each
Not every difference deserves your time. This article uses a rule of thumb of its own: look at any line that is more than ₹10,000 away from budget, or more than 10% of its budgeted amount away from budget. Either test on its own is enough to flag the line. It is not a standard. Change the figures to suit the size of your business, but keep the rule the same from month to month.
For each flagged line, write down:
- what you know so far, in one sentence
- one action
- who will take it
- by when
A flagged line is a question, not a verdict. Sometimes the answer is that the budget was wrong, and the action is to fix next month's budget.
Worked example: a content studio's September
Illustrative example: a fictional content studio in Jaipur, September, amounts excluding GST. The business and figures are invented.
| Line | Budget | Actual | Difference |
|---|---|---|---|
| Income | ₹7,00,000 | ₹6,40,000 | −₹60,000 |
| Salaries | ₹3,20,000 | ₹3,20,000 | ₹0 |
| Freelancers | ₹1,20,000 | ₹1,56,000 | +₹36,000 |
| Rent | ₹80,000 | ₹80,000 | ₹0 |
| Software | ₹25,000 | ₹31,000 | +₹6,000 |
| Marketing | ₹40,000 | ₹18,000 | −₹22,000 |
| Profit | ₹1,15,000 | ₹35,000 | −₹80,000 |
This fictional studio has no costs outside these five lines, so its sheet needs no "everything else" line.
Budgeted costs: ₹3,20,000 + ₹1,20,000 + ₹80,000 + ₹25,000 + ₹40,000 = ₹5,85,000, so budgeted profit is ₹7,00,000 − ₹5,85,000 = ₹1,15,000. Actual costs: ₹3,20,000 + ₹1,56,000 + ₹80,000 + ₹31,000 + ₹18,000 = ₹6,05,000, so actual profit is ₹6,40,000 − ₹6,05,000 = ₹35,000. Profit came in ₹80,000 below budget.
Applying the rule of thumb (more than ₹10,000, or more than 10%), four lines are flagged. Salaries and rent are on budget. The profit line is the result of the others, so it is not flagged on its own.
| Line | Difference | % of the budgeted amount | Why flagged | Good or bad news |
|---|---|---|---|---|
| Income | −₹60,000 | 8.6% | More than ₹10,000 | Bad: less income than planned |
| Freelancers | +₹36,000 | 30% | Both | Bad: more cost than planned |
| Software | +₹6,000 | 24% | More than 10% | Bad: more cost than planned |
| Marketing | −₹22,000 | 55% | Both | Good for profit, but ask why |
Income is only 8.6% below budget, under the 10% mark, but the ₹60,000 is well over ₹10,000. Software is the opposite: ₹6,000 is under ₹10,000, but it is 24% over its budget.
The owner's action list for September:
| Line | What the owner knows so far | Action | Who | By when |
|---|---|---|---|---|
| Income | One expected project did not start in September | Check whether the income is delayed or lost, and update next month's budget | Owner | 8 October |
| Freelancers | Two jobs used more outside writers than planned | List which client jobs used freelancers beyond plan | Studio manager | 10 October |
| Software | A new tool was added during the month | Decide whether to keep it, and if so add it to next month's budget | Owner | 10 October |
| Marketing | A planned campaign did not run | Decide whether it is postponed or dropped, and update next month's budget | Owner | 8 October |
The marketing line shows why the sign alone is not enough. Spending ₹22,000 less helped September's profit, but only because planned work did not happen.
Budget, forecast and P&L: what each is for
- P&L: looks back at what the business earned and spent in a month.
- Budget: a monthly plan for income, costs and profit, to compare with the P&L.
- Cash-flow forecast: looks ahead at money coming in and going out of the bank, week by week.
Discuss your monthly budget review in a demo
If you would like to talk through how you plan the month and compare it with what actually happened, and ask whether FastComply Books currently supports that routine for your business, request a demo and choose "Book a demo" on the form. FastComply Books is in an invitation pilot in India, so the demo is where we confirm what is available for your business.
