Business Budget Calculator

A cash budget is a financial plan that is prepared before the start of a month and takes into account all income and expenses. It's not an after-the-fact record at the end of the month. This calculator aggregates revenue and ongoing operating expenses, converts all data to monthly values, and shows the budget surplus or deficit, the cost structure leading to this result, and the sales level required to cover a company's fixed costs.

It calculates not only cumulative amounts. By splitting the costs into variable and fixed costs, it is possible to determine the break-even point. If one-time start-up costs are added, it is possible to calculate the required initial capital requirements and payback period. When actual expenses are entered, the plan becomes a variance report.

Here's how to use the operating budget calculator:

First set the period. Select monthly, quarterly or annually depending on your data. As all running items are internally converted to monthly values, consistency of results is maintained regardless of which selection is used for each item.

Then enter your revenues, variable costs and fixed costs. Non-relevant items can be left at zero. The descriptions below the fields will update in real time as you input values, and the results panel shows annual data, cost structure and break-even point.

These four optional features are designed to be turned on only if needed in order to keep the initial entry simple. If grants or interest is important, turn on the other income option. If you want to track taxes separately, turn on the tax line item. If the business has not yet been started, turn on startup costs. After the period is over, you can compare actuals with your plan by turning this feature on.

Fixed costs, variable costs and why this distinction is important.

Variable costs rise or fall depending on the volume of sales. These include things like inventory, raw materials, commissions, shipping and credit card fees. If no sales are made at all, there will be no variable costs.

Fixed costs are incurred regardless of whether sales are generated or not. These include rent, insurance, staff salaries, software subscriptions and loan repayments. Although they're relatively easy to predict and can therefore be budgeted for, they're unforgiving in that they remain the same even if revenues fall.

Companies with high fixed costs can make more profit than companies with low fixed costs when sales are increasing but they will lose money faster if sales fall. This is why these two types of cost are not combined into a single total cost position and considered separately.

Calculation method:

All recurring items are first converted to monthly values. If the data covers a period of one quarter, then the time factor is three; if it covers a year, then the time factor is twelve.

The total cost is the sum of all individual costs. This is a model used by all online costing calculators.

The break-even point is determined by the contribution margin. This represents the percentage of each sale remaining after direct costs are deducted. Dividing this margin by fixed costs will determine the sales required to make neither a profit nor a loss in any given month.

The startup capital includes one-time costs at the opening as well as a reserve for ongoing operating expenses and an emergency fund. The payback period is the time it takes to recover this capital through monthly surpluses.

Example calculation:

A small business creates a monthly budget plan. The sales are $40,000. Inventory costs are $12,000 while the total of commissions and credit card fees is $2,000 so variable expenses equal $14,000. Fixed expenses include salaries, payroll taxes, rent, water and electricity bills, insurance, software, marketing, professional services fees, loan repayments, and any other expenses which add up to $24,000.

The total cost is $38,000 and the sales are $40,000 so your monthly budget surplus would be $2,000 or $24,000 annually. The 5% profit margin is small and can easily be wiped out by a single bad month.

The contribution margin ratio is 65%, calculated by dividing $26,000 by $40,000. The fixed costs of $24,000 divided by .65 gives a monthly sales volume at the break-even point of approximately $36,923. Sales could decrease about 8% before the business would be losing money.

Cost categories and often overlooked points:

Most business expenses can be broken down into a short list of predictable categories, and hiring costs and the cumulative effect of subscription fees are particularly common oversights.

A payroll is more than just a paycheck. Employers have to factor in withholding taxes, health insurance, retirement contributions, workers compensation, equipment and training. If you focus only on the paycheck, you're significantly underestimating the true cost of hiring an employee.

Software is the opposite problem - the price per unit is so low it's hard to see. A tool that costs $19 a month and you have ten of them will cost $190 a month or $2,280 a year. So it pays to review your subscription mix quarterly rather than annually.

Repayments of loans are a special case.

Strictly speaking only the interest is part of the loan repayment that is considered an expense. The principal repayment simply reduces the debt and since no profit is consumed accountants exclude it from the income statement.

In terms of cash flow planning however, the entire repayments are deducted from your bank account each month. So such budgets will show the total repayment amount. It is important to note though that the budget surplus shown here represents the cash flow and not an actual profit figure.

Foundation: Capital and amortization period

Companies that are not yet established need two numbers which cannot be considered in a normal operating budget: how much capital should be available on day one and how long will it take to recoup this money?

A guide for small and medium-sized enterprises recommends calculating the one-time costs of starting up a business first, then adding at least one year's worth of monthly operating expenses. This will help ensure that enough funds are available before revenues are required to finance operations. A bank startup planning worksheet usually includes an additional quarter or so as an emergency reserve since unexpected costs often occur in the first year.

This amount is then divided by the monthly budget surplus to obtain the payback period. This answers a different question than the break-even point. While the break-even point asks how much revenue is required to cover the costs of the current month, the payback period asks how many months with surplus are needed to recover the invested capital.

Compare budget to actual spending.

A budget only becomes meaningful when it is compared to reality. The difference between planned and actual spending will show if a particular category is slowly deviating from the budget, which can be detected early by monthly review.

It's not always good to stay under budget. Check if the savings are real or just necessary expenses moved to next month. Overspending is not necessarily bad. If you can explain why and assess whether this situation will recur, there's no reason to worry.

Do a scenario analysis before you commit.

A budget is most useful when it's used to answer questions about assumptions before money is spent. For example, increase the salary expenses for one person and see how that affects your break-even point. Increase rent by ten percent and figure out how much additional income you need to make up for this.

Cancel some subscriptions and see how your fixed cost base changes. Individually these decisions may seem inconsequential but it is only when you consider them in the context of your overall cost structure that their true impact becomes apparent. A budget serves to bring all this information together in one place.

Common mistakes:

One of the most common mistakes is double counting. Invoices from suppliers that were paid by card should be included in materials costs and not recorded again under credit. Another mistake is rounding down expenses. Rounding up instead can turn an unexpected expense into a pleasant surprise.

A third mistake is to treat the budget as a one-off exercise. Seasonal fluctuations in revenue, price increases and changes in staffing all affect the numbers. A budget that isn't reviewed will eventually no longer reflect the true picture of your business.