Most services businesses that reach a few million in revenue have targets. Fewer have a budget. A target says where you want to end the year. A budget says how you will get there, month by month, and what it will cost.
For businesses on a calendar year, the last quarter is when FY2027 has to be built. This guide is for a first one.
Start with revenue from clients and pipeline
Do not start with last year plus a percentage. Build revenue from what you know.
Committed revenue. Signed contracts and recurring clients, by month, at the rates they pay.
Likely revenue. Renewals and expansions you expect but have not signed. Weight them by how confident you are.
New revenue. Pipeline you expect to win, weighted and phased by when the work would actually start, not when the deal closes.
Keep the three apart in the budget, so you can see how much of the year rests on work not yet won.
Check it against capacity
In a services business, revenue is limited by the people who deliver it. Multiply billable headcount by expected utilization and average rate, month by month. If revenue in the budget exceeds what the team can deliver, either the revenue is too high or you need to hire, and the budget must say which.
We cover measuring utilization in utilization rate for professional services firms.
Plan the hiring with dates
Payroll is usually the largest cost. Put each planned hire in the month they start, with their full cost including taxes and benefits. Allow for the time before a new hire is fully billable.
Hiring is also the decision with the longest lead time. A budget that shows you need a senior consultant in June tells you to start recruiting in March.
Budget overhead line by line
Rent, software, insurance, professional fees, marketing and travel. Take last year's actuals as the starting point for each line, then adjust for what you know will change. Watch software subscriptions closely, since they tend to grow quietly.
Add a monthly cash budget
A profit and loss budget tells you whether the year will be profitable. It does not tell you whether you will have cash in a given month. Add a cash budget that applies your actual collection timing, payroll dates, supplier terms, loan payments, tax payments and owner draws.
For a growing services business, the cash budget often shows a tighter year than the profit budget, because receivables grow ahead of collections.
Build a downside case
Take the budget and remove the uncommitted new revenue, or the largest client. See what happens to profit and cash. The point is not to plan for failure. It is to know in advance which costs you would cut first, and how much room you have.
Set a few targets that matter
Choose a handful of measures to track against the budget each month: revenue, gross margin, utilization, overhead, cash and receivables days are a reasonable set for a services business. More than that and nobody reads them.
Use it every month
A budget earns its keep in the monthly review. Compare actual results with the budget, explain each large difference in a sentence, and decide whether it changes anything for the rest of the year. Write the explanations down. Over a year they become the most useful record of how the business actually behaves.
Keep the original budget fixed for comparison, and maintain a separate rolling forecast that updates as the year unfolds.
What a budget will not do
It will not make the year happen. It shows where you expected to be, so you notice early when you are not.
It will also be wrong in places, as every budget is. What it gives you is the monthly comparison and the decisions that follow from it.
Frequently asked questions
When should a business build its annual budget?
Before the year starts. For a business on a calendar year, the budget for the following year is usually built in the last quarter, so hiring and spending decisions can be made in time.
How do you budget revenue for a services business?
Build it from committed client revenue, likely renewals and expansions, and weighted new pipeline, phased by when the work will start, then check it against the capacity of the delivery team.
What is the difference between a budget and a forecast?
A budget is a fixed plan set before the year begins. A forecast is updated during the year as results come in. Businesses usually keep the budget fixed for comparison and maintain a rolling forecast alongside it.
Why does a budget need a cash budget as well as a profit budget?
Because profit and cash arrive at different times. A business can be profitable for the year and still run short of cash in particular months, especially while it is growing and receivables rise.
What should be reviewed each month against the budget?
Revenue, gross margin, utilization, overhead, cash and receivables days, with a short written explanation for each significant difference from budget.
Where CFOLogic fits
We build the FY2027 budget with you from clients, pipeline and capacity, add the cash budget and downside case, and run the monthly review against it. Navigator, our software, explains variances in plain English from the books, so the monthly comparison is ready before the review meeting rather than built for it.