Budgeting for Small Businesses: How to Build a Budget that Isn't Useless

A Good Budget Starts With Two Things

There are two important characteristics a good budget should have.

The first is it should be goal-oriented — it should be working toward the goals of the business, giving essentially a roadmap of numbers to hit those goals. So, for example, if your goal is to make $200,000 of profit, then that’s where you should start with your budget and work backwards to figure out what your revenue needs to be, using what you know about your margin, your fixed costs, your wages, your rent, etc. If you start with the goal, how to get there becomes much more clear!

The second characteristic is it needs to be based in reality. You can't set your goal to be $200,000 of profit without having a reasonable expectation that you can get there from where you are today. That doesn’t mean it needs to be a small jump — it doesn’t need to be a 10% increase across the board — but there should be some basis in reality for how you're going to accomplish the goal you're setting with your budget. Otherwise, this is a waste of time.

A Real-Life Budget That Hit the Target - Here's the Trick

We've built hundreds of budgets for hundreds of clients. What the most successful ones do is break the goals down into something you as the business owner can actually understand.

If you're just using dollars — like “sell a million dollars worth of product” or “generate $100,000 worth of profit” — it’s sometimes hard to envision what that means for the day-to-day operations. But if you translate that into units sold or number of orders, it’s much easier to track, especially if you're not in the books every day.

One particular budget stands out: it was a $3 million company, and we set a pretty lofty revenue and profit growth goal. Instead of focusing on dollars, we told the owner: “Just sell 100 units a day.” That one shift changed how she looked at the whole year.

By the end of the year, her actual revenue was within $30 of our projection. Why? Because she had a clear, actionable daily goal. If she came up short one day, she made it up the next. It was simple, it was measurable, and it worked.

The #1 Budgeting Mistake Small Business Owners Make

The biggest mistake business owners make when they’re budgeting is they treat the budget as a restrictive thing, instead of a roadmap to help them reach their goals.

When you look at a budget and think, “Well, I can only spend $500 on marketing this month,” that’s very restrictive — especially for an e-commerce business. Your return on ad spend can change a lot, over the course of a year, even a week. So when the budget becomes this static, rigid thing, it can actually hurt your growth.

Instead, think of your budget as a living, breathing projection, not something that’s set in stone. That way, you can say, “Okay, my marketing ROAS is lower than last year, how much more can I increase spend and still hit my revenue and profit targets?”

It’s a guide, not a leash. If you treat it like a tool to help you get where you want to go not a set of handcuffs your budget becomes a lot more effective.

Before You Build a Budget, Get This Right

The first piece of advice I’d give when you're building your first real budget is this: make sure you have a clean starting point. None of the above will work if you start with faulty assumptions.

I know a lot of my answers boil down to “you need clean books,” but that’s because it’s true. Whether you're building a budget, a sales forecast, a business plan, a marketing plan, it all starts with clean financials.

You need reliable data on what’s already happened. That tells you things like your gross margin, your average monthly spend on payroll, utilities, rent, all of it. Without that, you’re guessing. Or worse, if your books are wrong, you’re building a budget off bad assumptions — and that’s going to cause even bigger problems down the line.

So before you fire up Excel or download a template, make sure you’re starting with clean, accurate books. That’s your foundation.

Want help building a budget that makes sense for your business? Let's talk!

‍

The Basics: Cash vs. Accrual (Plain English)

Cash basis accounting means nothing touches your books until it touches your cash account. You don’t record a sale until the money shows up in your bank.

Accrual basis accounting means you record the transaction when it actually happens — not when the cash moves. If you ship a product today but don’t get paid for 30 days, you still record the sale today. You record it as accounts receivable, then swap that out for cash when it hits the bank.

What Works Best for E-Commerce

For most e-commerce businesses, the right answer is accrual— or at least a modified accrual system.

If you’re selling DTC and don’t have receivables, that’s one thing. But you do have inventory. And inventory is likely your single largest asset, and your biggest expense is the cost of that inventory when it is sold.

You also probably have accounts payable — vendor terms, delayed payments, etc. If you’re not recording those, you’re missing critical parts of your financial picture.

So even if you don’t have receivables, you still need accrual for payables and inventory. Without it, your books aren’t giving you the full story.

Why Cash Basis Gets Dangerous at 7 Figures

Once your business scales, the cracks in cash basis accounting start to show.

Say you start selling wholesale. Larger orders, delayed payments. If you’re not recording sales when they happen, your revenue is disconnected from reality.

Same thing on the inventory side. More sales means more inventory. More vendor terms. You need to know how much cash is tied up in product and what you owe vendors. You can’t track that without accrual accounting.

Sticking with cash basis when you’re at or above seven figures means you’rerunning a complex business on a bookkeeping method built for lemonade stands.

When Cash Basis Might Be Okay

There are rare cases where cash basis works. Usually it’swhen:
- Your inventory is homogenous (like bulk vintage clothing)
- You don’t sell wholesale or give customer terms (your customers pay when or before they get the items)
- You pay for inventory up front (no payables)

And even then, you’re limited in how much insight you can get. Cash basis meansyou only see what’s happening when the money moves — but a lot happens beforeor after that.

So yes, the IRS allows some businesses to expense inventory as they buy it —but for most e-commerce brands, accrual is the better long-term choice.

Still using cash basis accounting? Or unsure if your books actually reflect reality? Lonely, and just want to talk to someone? Book a call and let's chat!

‍

What Is EBITDA (In Plain English)

EBITDA stands for Earnings Before Interest, Taxes,Depreciation, and Amortization.

It’s a way to measure the cash flow generated by the operations of the business, without the noise of non-operational accounting entries.

By backing out interest, taxes, depreciation, and amortization, you’re removing costs that aren’t directly tied to day-to-day operations and would look totally different under different ownership.

It gives you a number that reflects how much profit the business actually produces from operations — a useful way to compare performance across companies, time periods, or potential buyers.

Why EBITDA Matters If You're Selling (Or Scaling)

When you're valuing a business, one common method is toapply a multiple to EBITDA. A software company might be worth 20× EBITDA. A manufacturing business might go for 10× (bote these are just for illustration, please reach out if you want an actual range for your company).

The idea is to look at comparable businesses, what they sold for, and how that sale price relates to their EBITDA. Then you apply a similar logic to your business to get an estimate of what it might be worth on the open market.

Yes, there are other valuation methods — based on revenue, assets, and sometimes just hope and dreams. But EBITDA gives you a cash-based, semi-objective number you can work from.

Normalization vs. Manipulation

Let’s talk about a dirty little secret: most small business owners run some personal expenses through their business.

That conference in San Diego? You stayed three extra days. Did you reimburse the company? Probably not.

This is where “normalizing” EBITDA comes in. You add back expenses that technically hit EBITDA but aren’t really business-related or wouldn’t existunder new ownership — travel, meals, vehicle expenses, etc.

So is EBITDA manipulated? Sometimes, yeah — but it’s more often just adjusted to reflect the true economics of the business.

What founders *should* be worried about isn’t manipulation — it’s accuracy. Most small businesses don’t intentionally fudge their numbers — they just have sloppy books. Bad bookkeeping, unreconciled accounts, missing entries. That’s what really skews EBITDA.

How to Calculate EBITDA in a Shopify Business

Step one: clean your books. If your inventory, receivables,or payables are wrong, your EBITDA will be too.

For product-based e-commerce companies, COGS is your biggest expense and inventory is usually one of your biggest assets. If those aren’t tied out, the whole foundation crumbles.

Once your balance sheet is clean, identify any expenses that should be normalized — personal travel, car payments, anything that wouldn't show up under different ownership.

Then do the math:
- Start with Net Income from your P&L
- Add back Interest Expense
- Add back Income Taxes (not payroll taxes — only income-based taxes)
- Add back Depreciation
- Add back Amortization

That’s your EBITDA. It’s a measure of the business’s operational cash flow. And it’s only meaningful if your books are tight and your normalizations are honest.

Thinking about selling? Trying to get a real handle on cash flow? Afraid your books are a mess? Just want to chat and talk about sports? Book a call here