The word “realistic” is doing a lot of work in this question, and it’s the part most people get wrong. A budget built on what you hope will happen is a wish list. A budget built on what actually happened last year, adjusted for what you know is changing, is a tool you can use to make decisions.

Start with your historical numbers. Pull at least twelve months of actual revenue and expenses from your books. If your books are messy or incomplete, clean them up first because a budget based on bad data is worse than no budget at all. Look at your revenue month by month, not just the annual total. Most businesses have seasonal patterns they don’t fully appreciate until they see the numbers laid out.

Separate your expenses into fixed and variable categories. Rent, insurance, software subscriptions, and loan payments happen regardless of how much revenue you bring in. Materials, subcontractor costs, sales commissions, and shipping fluctuate with volume. This distinction matters because it tells you your baseline monthly burn rate, which is the minimum you need to cover before anything else.

For revenue projections, start with last year’s actual numbers and adjust based on specific, identifiable changes. You signed two new recurring clients in November, so those months going forward should reflect that added revenue. You lost a major account in March, so remove it. Avoid blanket assumptions like “we’ll grow 20% this year” unless you can point to exactly where that growth is coming from. Optimistic revenue projections paired with real expenses create a gap that shows up as a cash crunch around month six.

Build in a buffer for unexpected costs. Equipment breaks. A key employee leaves and you need to hire. A tax obligation surprises you. A good rule of thumb is 5% to 10% of total expenses as a contingency line item. It feels wasteful until you need it, and you will need it.

The budget only works if you actually use it. Compare your actual results to the budget every month. When revenue comes in lower than projected, you know immediately and can adjust spending. When a particular expense category keeps running over budget, you investigate why instead of discovering it at year end. This monthly review is where the real value lives. A budget you check once a year is just a spreadsheet.

If your business has multiple revenue streams or departments, break the budget down accordingly. A restaurant should separate food costs from bar costs. A contractor should budget by job type. The more granular your budget, the more precisely you can identify what’s working and what’s draining money.

For businesses that haven’t done this before, budgeting and cash flow forecasting support can help you build the framework right the first time. And keeping your books accurate throughout the year through small business tax returns and ongoing bookkeeping makes the whole process dramatically easier because you always have reliable numbers to work from.

The goal isn’t a perfect prediction. It’s a reasonable plan that gives you something to measure against so you can course-correct before small problems become big ones.