Many owners make their first budget by opening last year's figures, adding about 10 percent to sales, trimming costs a little and arriving at an attractive profit. By year end the sales have not followed, some costs were never in the plan, and the bank account is tight even though the profit and loss still shows a surplus.
This guide sets out a seven-step method for a first budget, from building sales out of real customers to comparing actuals every month. It includes a hypothetical service-business example, how to use the numbers to decide, and what to watch for in contracts that lock costs in ahead of time.
The core answer
A usable budget starts from things you can count: the customer list, the work you can actually deliver, prices and contracts already binding. It does not start from a growth percentage you wish for. Variable costs, fixed costs and capital expenditure are then kept apart, and a separate cash budget is built because customers pay later than the sale and taxes run on their own cycles. Finally, each line gets an owner and an approval limit, and actuals are compared with the budget every month against a threshold that says how large a variance must be before it needs explaining.
The legal rule We found no rule requiring an ordinary SME to prepare a separate annual budget. What is required is real accounts and financial statements for each accounting period. A budget is therefore a management tool, yet several of its parts meet the law head-on: leases, minimum-purchase terms, subscription contracts and customer payment terms all fix budget numbers before the year begins.
Our practical view A good budget is a document that lets the owner decide faster in the month when numbers start to drift, not one that is finished and filed away. If you must choose, keep it simple and compare every month rather than building a detailed budget that is opened once a year.
1. Why "last year plus 10 percent" does not work
It cannot say who the extra sales come from. If one large customer that gives a quarter of the company's revenue stops buying, the 10 percent figure helps nobody. It also does not ask whether people or machines are available for the extra work. Costs are often raised by the same rate even though some are commitments that escalate under a contract and others are discretionary.
A better approach builds the budget from the bottom up: list, volume and price first, then the total. The growth percentage becomes a result you can test, not an assumption you start with.
2. Step 1: Estimate sales from customers and capacity
- List customers or customer segments. Separate contracted recurring customers, project customers, and occasional or hourly customers, because each has a different level of certainty.
- Multiply volume by price. For example, the number of customers renewing times the monthly fee, or the number of jobs times average job value. Use last year's actual figures where they exist; otherwise use quotations sent and the rate at which you actually win, not the rate you hope for.
- Separate confidence levels. Contracted customers go in at full value, quoted work at your historical win rate, and anything without a buyer behind it goes into a separate stretch target.
- Check capacity. Compare the hours the sales require with the hours you can really sell, which is not all working hours, since meetings, leave, training and internal work must be deducted. If sales exceed capacity, the budget needs a cost for more staff or subcontracting, or the sales figure must come down.
3. Step 2: Variable costs
Variable costs move with sales or volume: goods bought for resale, raw materials, freight, commissions, payment fees or subcontract fees per job. Set them as a rate per unit or a percentage of sales based on what has actually happened.
Sales minus variable costs is the contribution. This is the money left to pay fixed costs, and it is the figure used to find break-even in the example below.
4. Step 3: Fixed costs
Fixed costs continue even if sales fall: regular salaries and employer add-ons, rent, basic utilities, software subscriptions, bookkeeping and audit fees, insurance and standing marketing. Sort them into three groups to make decisions easier.
| Group | Examples | How fast it can be cut |
|---|---|---|
| Bound by contract | Rent, annual subscriptions, instalments | Not until the contract reaches an exit point; read the terms |
| Bound by people | Salaries, regular wages | Slowly, and with legal cost if employment is ended |
| Discretionary | Marketing, training, entertainment, unplanned office items | Can be delayed or cut next month |
If an owner or shareholder works in the company, put in a salary at the rate actually intended, rather than leaving it at zero and drawing dividends later. Zero makes budgeted profit look better than it is, and money taken out by the owner should be kept properly separate from company money. See owner's salary, dividends, advances and shareholder loans.
5. Step 4: Capital expenditure and depreciation
Capital expenditure (capex) is money spent on assets used over several years, such as computers, tools, machinery, vehicles and fit-out. Put it in its own table, for two reasons.
- In the profit and loss, these assets are not expensed in full in the year of purchase. They are spread as depreciation over their useful life.
- In the cash budget, the money leaves in full on the day it is paid. If you pay in cash, the bank balance drops at once.
If capex is mixed into ordinary expenses, profit looks too low and decisions go wrong. If capex appears nowhere, cash disappears with no one seeing it coming. How depreciation is recognised, and the rates used for tax, should be agreed with the accountant or tax adviser. The example below uses equal annual write-off over an assumed life.
6. Step 5: See cash apart from profit
Profit in the books is counted when you sell or deliver, but cash arrives when the customer pays. On 30-day credit, January's revenue becomes February's cash. The faster the business grows, the more cash is tied up in receivables. This is the main reason profitable companies run short of cash. See profitable but short of cash.
A simple monthly cash budget runs as follows.
- Opening cash
- Add expected receipts, timed from the invoice due date, not the sale date
- Deduct payments to suppliers and creditors, using the credit terms they actually give
- Deduct capital expenditure in the month it is paid
- Deduct taxes and remittances on their cycles: net VAT payable, withholding tax deducted, social security contributions and corporate income tax when due
- Closing cash, compared with the minimum cash level you have set
A note on tax: VAT charged to customers is not the company's revenue. Budget on figures before VAT and put the net VAT remittance in the cash budget. Filing dates and rates for each tax should always be checked with the Revenue Department or the accountant because they can change by notification. This guide gives no fixed dates.
7. Step 6: Budget owners and approval limits
A budget with no owner is a budget nobody answers for when it is exceeded. Set it up as follows.
- Each line or category has one budget owner: the sales manager owns sales and commission, the operations manager owns variable costs and subcontracting, and management owns rent and standing contracts.
- Set approval limits: who may spend within budget, who must ask when over budget or over an agreed amount, and which items the company owner must always approve, such as multi-month commitments and capex.
- Tie this to the company's authority matrix. See owner approves everything: the delegation of authority matrix.
8. Step 7: Monthly budget vs actual and variance thresholds
Each month after closing the previous month, produce one table per category showing budget, actual, variance and reason. The thresholds below are suggestions for an SME and should be adjusted to the size of the business.
| Item | Threshold needing explanation (hypothetical example) |
|---|---|
| Total sales | More than 5 percent under budget two months in a row |
| Each expense category | Variance over 10 percent and over 10,000 baht |
| Capital expenditure | Every item not in the plan needs approval before payment |
| Closing cash | Below the minimum cash level set |
| Overdue receivables | Above the agreed share, for example one fifth of all receivables |
When a variance appears, ask three questions in order: did volume differ, did price differ, or is it timing. Each answer leads to a different decision. Take the result into the monthly meeting; see the monthly management meeting.
9. Hypothetical example: an IT support business for SMEs
Every figure in this section is a hypothetical example to explain the method. It is not data from any company and not an industry standard. Amounts are in baht, excluding VAT.
Step 1: sales from customers (hypothetical example)
| Customer group | Volume | Price | Annual sales |
|---|---|---|---|
| Monthly support contracts | 12 customers x 12 months | 15,000 per customer per month | 2,160,000 |
| Installation projects | 10 jobs | 80,000 per job | 800,000 |
| Hourly work | 300 hours | 1,000 per hour | 300,000 |
| Total | 3,260,000 |
Capacity check (hypothetical example) Three technicians at 160 hours a month each give 5,760 hours a year. Capping sellable hours at 60 percent gives 3,456 hours. The work needs 1,152 hours for monthly support (8 hours per customer per month), 1,000 for projects (100 hours per job) and 300 hourly, a total of 2,452 hours, about 71 percent of the cap. It is deliverable, with limited headroom.
Steps 2 to 4: costs and expenditure (hypothetical example)
| Item | Basis | Per year |
|---|---|---|
| Variable cost: resold licences and cloud | 10 percent of sales | 326,000 |
| Contribution | 3,260,000 less 326,000 | 2,934,000 |
| Salaries, 3 technicians | 28,000 x 3 x 12 | 1,008,000 |
| Salary, 1 admin and sales | 22,000 x 12 | 264,000 |
| Salary, owner working full time | 40,000 x 12 | 480,000 |
| Employer add-ons and benefits | assumed 5 percent of salaries | 87,600 |
| Office rent | 18,000 x 12 | 216,000 |
| Software subscriptions | 6,000 x 12 | 72,000 |
| Internet and phone | 4,000 x 12 | 48,000 |
| Bookkeeping and audit | 5,000 x 12 | 60,000 |
| Marketing | 5,000 x 12 | 60,000 |
| Insurance and sundries | 2,000 x 12 | 24,000 |
| Total fixed costs | 2,319,600 | |
| Depreciation | equipment 300,000, straight line over 5 years | 60,000 |
| Operating profit before tax | 2,934,000 less 2,319,600 less 60,000 | 554,400 |
Operating profit is about 17 percent of sales. Break-even is (2,319,600 plus 60,000) divided by 0.90, which is sales of about 2,644,000 baht. Planned sales are about 19 percent above that, so some shortfall can be absorbed.
Step 5: year-one cash (hypothetical example) Assume the company starts the year with no outstanding receivables, buys 300,000 baht of equipment in cash early in the year, and gives customers 35 days' credit on average. Year-end receivables are then about 3,260,000 divided by 365 times 35, roughly 313,000 baht.
| Item | Amount |
|---|---|
| Operating profit before tax | 554,400 |
| Add back depreciation (not a cash payment) | 60,000 |
| Less increase in receivables | (313,000) |
| Less equipment purchase | (300,000) |
| Cash left before income tax, dividends and loans | 1,400 |
The example shows a paper profit of 554,400 baht with almost no cash left. If the owner wants dividends or the company must pay income tax, a reserve or credit line is needed. The minimum cash level in this example is about 1.5 times monthly fixed costs (2,319,600 divided by 12 is about 193,300), roughly 290,000 baht.
Steps 6 and 7: owners and thresholds (hypothetical example) The sales manager owns sales and receivables, the operations manager owns variable costs and hours, and the owner approves capex and any commitment longer than six months. The variance thresholds are those in the table in the previous section.
10. What decisions the budget triggers
Continuing the hypothetical example, every figure remains hypothetical.
| Decision | Trigger from the budget | Hypothetical example |
|---|---|---|
| Hire | Actual hours above 85 percent of the cap for two months running, with work to fill them | A fourth technician costs about 28,000 x 12 x 1.05 = 352,800 a year, so extra sales of about 352,800 divided by 0.90 = 392,000 are needed to break even |
| Change price | Low contribution per hour relative to staff cost | Raising the monthly fee from 15,000 to 16,500 adds 216,000 a year if all customers stay. Even losing one, the total is still about 18,000 higher, since 11 x 16,500 x 12 = 2,178,000 against 2,160,000 (before the variable cost of the lost customer) |
| Cut cost | Cash below the minimum for two months running | Start with discretionary items such as marketing at 60,000 a year, not with committed contracts |
| Delay capex | Cash insufficient before a tax date, or early in the year while receivables build | Postponing test equipment of 100,000 to the third quarter eases early-year cash |
The principle is to tie decisions to thresholds written in advance, rather than deciding once the money has run out.
11. Contracts that lock costs in: the legal angle before you sign
Many fixed costs come from contracts. Before signing, put the total commitment over the whole term into the budget, not just the monthly figure.
- Office or premises lease. Check the term, rent escalation, deposit, renewal and the penalty for leaving early. Under Civil and Commercial Code section 538, a lease of immovable property for more than three years must be in writing and registered with the competent official, otherwise it is enforceable for three years only. A tenant who invests heavily in fit-out should treat registration seriously or negotiate compensation at the end of the term. For the kind of terms to read, see ready-built factory lease.
- Minimum-purchase terms. A supplier may require you to buy at least a set quantity a year or pay the shortfall. The budget must carry that minimum even if sales fall.
- Subscription contracts. These often renew automatically and require advance notice to cancel. Put the notice dates in a calendar. See software subscription contracts.
- Customer payment terms. State credit periods and the collection process clearly in contracts and quotations, since they feed directly into the cash budget. See unpaid customer invoices.
- Contracts with related parties. A lease from a director, for instance, needs clear terms and approval. See related-party lease or purchase approval.
All of this depends on the wording of each contract. Have it read by someone with legal knowledge before signing when the total commitment matters to the company.
12. Common mistakes
- Building the budget as "last year plus a percentage", with no source for the sales and no capacity check
- Mixing capex into ordinary expenses, distorting profit or hiding the cash outflow
- No cash view, watching profit only and forgetting that customers pay late and taxes run on cycles
- Setting sales on hope, entering customers with no contract at full value
- Forgetting committed contracts, such as automatic renewals, minimum purchases and rent that rises each year
- No budget owners, so nobody explains the variances
- Preparing it and never comparing, so the budget is opened once
- Leaving the owner's own pay out, which overstates profit and leads to wrong dividend decisions
13. Checklist
- Customer or segment list with volume, price and confidence level
- Capacity checked against budgeted sales
- Variable costs, fixed costs and capex in separate tables
- Depreciation and break-even calculated
- Monthly cash budget timed by due dates for receipts and payments, including tax cycles
- Minimum acceptable cash level set
- Budget owner named for every category, with approval limits
- Variance thresholds set and a monthly meeting date for budget vs actual
- Cost-locking contracts collected with renewal and cancellation-notice dates
- Accountant has checked the depreciation and tax treatment before the numbers drive decisions
Further reading
- Profitable but short of cash — when profit and cash move apart
- Owner approves everything: the delegation of authority matrix — setting approval limits for budget owners
- The monthly management meeting — where the budget vs actual table goes on the agenda
- Unpaid customer invoices — when money arrives later than budgeted
- A company's first-year accounting — what the accountant needs from the owner
- From one-off jobs to monthly recurring revenue — making sales more predictable
A usable budget is built from real customers and capacity, keeps capex apart from expenses, views cash separately from profit, and is compared with actuals every month, with budget owners and thresholds agreed in advance.
We help review the leases, minimum-purchase terms and subscription contracts that lock in a company's costs, set out customer payment terms, and align approval authority with the budget. Call +66 92 254 2045 or send us the details. See also business plan services and accounting and tax services.
This guide is published by Suwanvara Law Firm — a Khon Kaen law firm established in 1986. General information only, not legal advice on a specific matter.
