How to Build Your 2027 Budget: A Practical Guide for Small Business Owners
This is the time of year when you’re thinking about 2027: what you want the business to earn, who you might hire, and what you’ll finally get around to fixing. A budget turns those ideas into numbers you can act on.
The short answer: start with this year’s actual numbers, set a few goals, forecast revenue three ways, map your costs, plan for cash, and review the budget monthly. Here’s how to do each step, whether you run a three-person shop or a team of fifty.
1. Start with what actually happened this year
A budget is only as good as the numbers underneath it. Reconcile your accounts through the latest month-end (if December isn’t closed, use the last 12 closed months) and pull your profit and loss statement by month. Set aside one-time items, like a big equipment purchase or a lost client, so they don’t distort your starting point.
Our Q4 financial to-do list walks through the clean-up, and here’s how to read your profit and loss statement.
2. Decide what the budget is for
Pick three to five goals for 2027 and put a number on each one:
- Profit: “Finish the year with a 12% profit margin, up from 8%.”
- Cash: “Build a cash reserve that covers three months of operating expenses.”
- Growth: “Add one full-time hire by the third quarter.”
- You: “Take home $X a month in owner pay, consistently.”
Give your own paycheck a line in the plan from the start. Then every number in the budget should either support one of your goals or have a good reason to be there.
3. Forecast revenue three ways
Don’t plan around a single number. Build three versions:
- Base case. Your last 12 months, adjusted for what you already know: contracts starting or ending, planned price changes, and how much work your team can realistically handle.
- Cautious case. What happens if your slowest quarter runs long, or your biggest client leaves?
- Stretch case. Where does revenue land if a new service takes off?
Build your spending plan around the base case, and decide now what you’ll do if the cautious case shows up. For example: “If we’re 10% behind forecast by the end of March, we pause the new hire.”
4. Map your costs, including what’s already changing
Sort your expenses into fixed costs (rent, salaries, insurance, software, loan payments) and variable costs (materials, contractors, merchant fees, advertising). Fixed costs are what you owe every month, even in a slow one, so they set how much risk you can take on.
Then check what’s already changing: insurance, lease, and software renewals; planned raises and new hires, with the employer taxes and benefits that come with them; and supplier price increases.
5. Plan for cash, not just profit
A business can be profitable on paper and still run short of cash. Loan principal, inventory, equipment, and slow-paying customers all affect your cash without showing up as expenses on your profit and loss statement. So build a simple month-by-month view of cash in and out, with three lines of their own:
- Taxes. Set aside a percentage of your income as you earn it, and note when estimated payments are due. Your tax professional can help you choose the percentage.
- Your pay. A regular paycheck or draw you can count on.
- A cash cushion. Aim for three to six months of operating expenses, building toward it a little each month. Our post on building a business emergency fund goes into how.
6. Set a monthly review rhythm
A few days after your books close each month, ask four questions: How did we do against the budget? What’s behind the biggest differences? How’s our cash? Do we need to change anything? Once a quarter, update the forecast with what you’ve learned. A budget that adjusts is more useful than a perfect one nobody opens after January.
If you want to track a few key measures alongside it, our guide to KPIs that matter for your industry can help.
What it looks like in practice
Here’s a simplified example for a small service business, with made-up numbers. The goal is a 12% profit margin, up from 8% this year.
| Line item | 2026 actual | 2027 cautious | 2027 base | 2027 stretch |
|---|---|---|---|---|
| Revenue | $600,000 | $600,000 | $660,000 | $720,000 |
| Variable costs (28% of revenue) | $168,000 | $168,000 | $184,800 | $201,600 |
| Fixed costs | $384,000 | $396,000 | $396,000 | $396,000 |
| Profit | $48,000 | $36,000 | $79,200 | $122,400 |
| Profit margin | 8.0% | 6.0% | 12.0% | 17.0% |
Fixed costs stay at $396,000 in every scenario, so the cautious case drops the margin to 6%. That’s why it needs a plan before the year starts. The base case meets the goal only if revenue grows 10% and fixed costs rise about 3%. (The stretch case assumes no new fixed costs.)
Quick answers
When should I start building next year’s budget?
- Start in the fall, using your most recent 12 closed months as the base, so you have a plan in place before January.
How much cash should a small business keep in reserve?
- A common target is three to six months of operating expenses, built up a little each month.
How often should I review my budget?
- Monthly, a few days after your books close, with a forecast update once a quarter.
Walk into January with a plan
A good budget doesn’t have to be complicated. Start with real numbers, tie them to goals you care about, and take a quick look every month.
If you’d like a partner for it, that’s what our CFO Advisory team at Two Roads does. Your CFO becomes part of your leadership team, with regular touchpoints each month, helping you turn your numbers into clear decisions, from budgeting and cash flow to growth planning. Schedule a call and we’ll help you build your 2027 plan.