How to Create a Budget in Business

By Kathryn Haring - May 05, 2020

Budget Creation 

HubSpot Video

A budget tells the story of how a team will execute over a period of time. The intention of a budget is to allocate financial resources against strategic objectives to pursue the meaningful work of scaling a SaaS business. An effective budget should be realistic, comprehensive, and aligned. 


For a budget to be realistic, it must be appropriately linked to past performance or benchmarked with realistic expectations where past performance cannot serve as a guide. The enemy of realism in the budgeting process is the blinding optimism of entrepreneurial leadership. As a result, effective executive teams need to access a more critical side of their nature when budgeting. Where strategic decks, company announcements and annual reports focus on the future and are optimistic in nature, budgets should be more likely to be achieved than missed. Despite this, management teams all too often set budgets that are optimistic from the start and impossible by February. 

A GSV team member served on the board of a growth stage software company recently and saw the optimism vs realism problem first hand. The management team had set a ‘board budget’ which was the budget reported to the bank for covenant purposes. Then the management team set a management budget which served as the board’s true budget. Next there was a final budget intended to be the stretch budget. By March, the management team had all but abandoned reporting actuals to any budget but the ‘board budget’ and had to be reminded constantly that this budget, which they were not achieving, was intended to be the most pessimistic. 

The core problem in their budgeting was a lack of realism. It was plainly obvious to the GSV team member that all three budgets were fundamentally flawed. Each budget included amounts for new sales bookings and sales and marketing expenses. The GSV team member compared those amounts and revealed that in the most pessimistic case, the management team thought they could achieve $0.45 in sales efficiency (how much sales & marketing expenses needed to achieve $1 of new ARR bookings). Knowing that the top 25th percentile struggles to beat $0.75 in sales efficiency, it is obvious that the proposed budget will likely be low on the revenue estimate throwing all the other expense categories out of balance. 


A comprehensive budget addresses each of the key strategic goals fully. This means not only does the budget take the past performance into consideration, but it is also sufficiently detailed to address each key strategic goal in the following year. Businesses morph and change, so for a budget to be comprehensive, a budget needs to take changes into account and not just consider past performance. 

An easy way to accomplish this is to precede budgeting with strategic planning. A comprehensive strategic planning process incorporates the leadership and key roles within the company to design the most meaningful activities to focus on in the coming phase. The length of the phase is a year for most businesses. Each of the new strategic initiatives need to have a budget impact analysis to be incorporated into the budget formed from past performance. 


Someone must own and manage a budget for it to mean anything. Management creating a budget and hiding it from the people making cost-based and revenue impacting decisions is like playing a multi-month game and hiding the score. It is ineffective and inert at best. At worst, it wrecks the business. 

An aligned budget requires a few key items: 

  1. Ownership: Each department and business unit will have a budget owner (responsible for the outcome) and a budget accountable lead (someone responsible to know where the group is vs the budget). Any non-departmental budgetary items (special projects etc.) must have an owner and an accountable lead. 
  2. Incentives: Incentives must be based at least in part on hitting or beating the budget.
  3. Feedback: Companywide budgets must be calculated and reported on monthly with owners responsible to explain and contain any variances. 

Below is a general step-by-step guide that will get you started on creating your own budget creation plan.  


  1. Create a budget planning packet that includes at a minimum the following data:
  2. Historical financials by business unit / department (by budgetary reporting area)on a monthly basis,
  3. Strategic initiatives by the business
  4. Known cost increase information (i.e. key payroll, key vendors, contract step ups, rent escalations, etc.).

Meeting 1: Vision and Delegation

  1. Share the goal of this play and the preamble in addition to walking through the company’s Strategic initiatives and set a budget leader for the company (usually the CFO or controller). Each strategic initiative must be assigned to a department or to a person if not department related.
  2. Set vision and objectives for the budgeting process (ensure each budgetary reporting area leader has a clear understanding of the goal and her responsibility to design a budget that she will lead towards). Also set standards for how the budget should be reported (i.e. explain the exact format and how the budget reporting area leader should ensure it is realistic, comprehensive and aligned). Ensure these standards include examples of what sufficient backup evidence to the budget look like.
  3. Set a deadline for reporting budget to the budget leader and a date and time for the next meeting (reporting to meeting gap should be at least 2-3 days). The budget leader is responsible to consolidate the reports into one larger document including the evidence. For larger teams, the budget leader might also meet with each reporting area leader to critically assess the budget at least once before incorporating. 

Meeting 2: Budget Review and Defense

Share the consolidated document at least 1 day before the meeting. All participants should come prepared to:  

  • Defend their contribution 
  • Critically assess the other inputs
  1. Open the meeting by assigning roles:time keeper (responsible for keeping the meeting progressing on time and suggesting a sub-meeting when a deep dive starts with the team), secretary (responsible to capture all action items and follow-ups mentioned by the team).
  2. Share the goal of the budget process again including the strategic initiatives. Explain the purpose behind making budgets realistic, comprehensive and aligned.
  3. Have the budget leader walk through the top-level numbers including any gaps between current cash or capital accessible related to cash or capital needed. This gives each participant an idea of why being critical is important. 
  4. Each budgetary reporting area leader should walk through their budget starting with the largest and ending with the smallest.End the meeting with a date when all participants will receive the follow-up and action items as well as a date when those items are all due.

Meeting 3: One-on-One Meetings

  1. Collect the action items and then work with the budget leader to focus the budget and align it with the capital available.Often times, the strategic planning process results in more initiatives than current resources allow. This means tough decisions.
  2. Once you and the budget leader have a final report, schedule meetings with any affected reporting area leaders and explain the cuts in context of the broader initiatives of building a strong company.
  3. Finalize the budget for presentation to all parties.

Meeting 4: Budget approval

  1. Present the budget to the board for approval (if required).
  2. Recycle Meeting 2 and Meeting 3 if needed by board feedback


  1. Ensure that each budget reporting area has a cash-based incentive to hit the budget. This could mean more resources to achieve variable comp related to sales or a % achievement to get a portion of their cash bonus.
  2. Ensure that the budget leader also has a cash incentive related to the entire company hitting the budget.
  3. Make sure to have a way to address incentives if the budget needs a revision.
  4. Budget delivery
  5. Present the budget to the entire company
  6. Ensure that the reporting area leaders present their portion of the budget to their departments. 


If your budget includes payroll and the team is too small to sufficiently hide the pay, then remove payroll from the departmental areas or make it a blank number on the P&L. Payroll and compensation can be managed from the top for smaller teams. 

If you are struggling to get people to care about following up with the budget, then your incentives are not meaningful enough. 

If all you hear is ‘we are too thinly staffed’ and ‘we cannot possibly accomplish this with these few resources’, be in good cheer as this is the common refrain from running a SaaS company. Remind the team of the vision of the company and the importance to remain focused only on what is most important. Often times in SaaS firms, the various requests from customers, partners, vendors, and internal stakeholders create a fog of strategic confusion that leads to people running frazzled and incapable of accomplishing anything. Be wary of this. Such feedback in the budget process is indicative of a lack of focus. 

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