How Much Are UK Small Businesses Over, and Under, Budgeting?

Small Business Tips

Holly Woodward Engagement & Communications Associate at Capital on Tap

Holly Woodward 09 May 2024 minute read

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Amidst a recession, labour shortages and limited funding, small businesses in the UK are starting to feel the strain when it comes to business finance. In fact, 60% of business owners say it’s becoming more challenging to keep to their business’s budget because of the economic downturn. But what are SMEs’ budgeting habits, and how have these changed since the UK went into a recession?

To find out, the team here at Capital on Tap surveyed 250 small business owners to identify which business expenses companies are most likely to over, or under, budget for. We also looked into how often different industries are re-forecasting their budgets, as well as providing expert advice on how to navigate budgeting during a recession.

The most common under-budgeted business expenses

Forecasting a business budget isn’t always straightforward. Unexpected events, changes within a company or a shift in the industry’s landscape can lead to overestimating or underestimating costs. If you’re a small business owner and you find that you’re met with unexpected costs, a business credit card could help you out in the short term by offering interest-free spending for over a month, and helping with short-term capital solutions .

With 29% of small businesses saying they under-budgeted their entire forecast, we’ve set out to discover which business expenses entrepreneurs tend to do this for the most.

1. Utilities and maintenance costs

Across all industries in the survey, utilities and maintenance emerged as the business expense most frequently under-budgeted for, with 31% of business owners admitting they hadn't accurately predicted these costs in the last financial year.

The reason may be as simple as utility costs fluctuating throughout the year, but unexpected repairs from equipment or building damage can also drive up maintenance expenses. SMEs may also underestimate their utility usage, especially if they plan to expand operations, potentially leading to budget overruns.

2. Equipment and technology costs

Equipment and technology costs were frequently underestimated, with 28% of small business owners admitting to falling short in this area. Half (50%) of businesses in the sales and marketing sector under-budgeted for this — the most of any industry in the study. On average, across all industries, businesses under-budgeted this by 17% in their initial forecast

41% of small business owners in the equipment and technology industry also underestimated these costs. This could be unsurprising given that this industry is very reliant on the tools that they use and investing in these could help set them apart from the competition.

3. Shipping and import or export fees

23% of businesses under-budgeted their shipping and import or export fees across the last financial year. There are many unforeseen reasons these could change across the time period, from economic changes, including the recession, to ongoing worldwide volatility with regards to wars in Ukraine and Gaza.

Business expense	% of all business owners that under-budgeted for this
Utilities and maintenance costs (e.g electricity and gas)	31%
Equipment and technology costs	28%
Shipping and import or export fees	23%
Advertising and marketing	23%
Transport and logistics expenses	22%
Insurance premiums	22%
Stock	21%
Inventory or storage costs	19%
Contingency fund	18%
Team Socials	17%

The most common over-budgeted business expenses

Just as it’s easy to under-budget, it’s also common for business owners to overestimate expenses - with 30% of small business owners admitting to doing this, showing how difficult it can be to get your budget correct. Just like under-budgeting, over-budgeting also has its drawbacks, potentially leading to unnecessarily high reserves and missed opportunities for growth.

We looked at which business expenses entrepreneurs tend to over-budget for the most.

1. HR consulting or outsourcing costs

One of the most over-budgeted business expenses was HR consulting or outsourcing costs, with 33% of business owners admitting they had allocated more funds than necessary for this category. On average, business owners over-budgeted for HR consulting or outsourcing by 8%.

This may be due to uncertainty about legal compliance, or complex labour laws. Additionally, the initial setup costs for outsourcing contracts can lead to higher budget estimates.

2. Shipping and import or export fees

The next most over-budgeted expense was shipping and import or export fees, with 32% of business owners indicating they allocated too much for these costs.

This was also one of the most under-budgeted expenses, showing how difficult it can be to fully understand this cost. Like utilities, shipping fees can fluctuate throughout the year, and tariffs can often be unpredictable, potentially facing SMEs with unexpected expenses.

3. Loan payments

Loan payments were revealed to be another common expense that was over-budgeted, with 31% admitting they originally planned to spend more in this area. On average, small businesses over-estimated these costs by 6%. Though this might not seem like a lot, in the context of a business budget, this is a significant loss in terms of funds. The extra money set aside for overestimated loan payments could have been invested in revenue-generating activities, which could impede business growth and innovation.

Business expense	% of all business owners that over-budgeted for this
HR consulting or outsourcing costs	33%
Shipping and import or export fees	32%
Loan payments	31%
Research and development (e.g market research or product development)	31%
Office space rental deposits	31%
Entire forecast	30%
Team socials	30%
Payroll (the total cost of employing your staff)	30%
Stock	30%
Taxes	28%

Trends in budget management

Our research found that 46% of all small businesses review their budgets at least once a month, providing a good benchmark for other small business owners to follow.

For most established businesses, reviewing and updating budgets on an annual basis is common practice. However, for small businesses, more frequent budget reviews are key, not just for keeping an eye on expenses but also for strategic decision-making, adaptability, and financial stability.

Industry	Average no. of times per year business owners from this industry re-forecast their budget
Sales and Marketing	30
Travel and Transport	24
Education and Tutoring	14
Agriculture and Farming	13
Financial Services	13
Arts and Crafts	13
Technology and IT Services	11
Building and Construction	11
Retail	11
Real Estate	8
Personal Care	7
Manufacturing	6
Hospitality	5
Entertainment and Events	5

Small businesses in the sales and marketing industry are particularly committed to frequent budgeting, with an average of 30 reviews per year — the most of any industry. Interestingly, half (50%) of business owners in this space said they re-forecast their budget once a week, perhaps demonstrating the high volatility of the sector.

The travel and transport industries rank second for frequent budget reviews, with businesses conducting an average of 24 re-forecasts each year. Meanwhile, businesses in the education and tutoring sector review their budgets on average 14 times a year.

At the other end of the scale, the hospitality and entertainment/events industries review their budgets an average of just five times a year — the lowest number of reviews of all. Perhaps this is due to these sectors being closely linked to customer experiences and having seasonal peaks that drive revenue, prompting them to focus budget reviews around these peak periods.

Our research also revealed that budgeting is a critical focus for Gen Z business owners. Those between the ages of 18 and 24 say their business reviews its budget an average of 29 times per year, compared to businesses owned by 35 to 44 year olds, where budgets are reviewed 10 times a year.

How do small businesses feel about the recession?

The UK’s small businesses have been hit hard by the recession. 60% of small business owners say that keeping to their budget has become more challenging. This increases to four-fifths (80%) of businesses in the travel and tourism industry - the most of all of the industries. On the other hand, the financial services industry is the least likely to say that keeping to their budget has become more challenging, but a large proportion, one-third (33%), still agree.

In addition to this, 56% of small business owners say the recession has already negatively impacted their revenue and profitability - this has hit the sales and marketing industry the hardest with 88% saying this is the case. Whilst this is a concerning time, it’s worth noting that recessions do allow businesses to make strides on their competitors by working on developing new products that could see success in the recovery period.

Over half, 51% of businesses plan to, or have, re-forecasted their budget in line with the news about us entering a recession. 70% of entertainment and events, and technology and IT services business owners are the most likely to agree with this statement. This could be due to the general public paying closer attention to their spending in the case of the entertainment and events industry. Technology and IT services could be experiencing a similar pinch when it comes to B2B budgets.

Industry	% who plan to re-forecast their budget, or have done so, due to the recession
Entertainment and Events	70%
Technology and IT Services	70%
Sales and Marketing	63%
Arts and Crafts	59%
Personal Care	56%
Retail	55%
Building and Construction	53%
Hospitality	43%
Travel and Transport	40%
Real Estate	38%
Manufacturing	36%
Financial Services	22%
Agriculture and Farming	17%
Education and Tutoring	14%

How to successfully forecast a budget for your business

Rebecca Alford, Finance Director here at Capital on Tap provides expert tips for small business owners on how to best plan a business budget.

“Forecasting a financial plan for the year ahead is a vital tool for shaping your business’s strategy. The most successful forecasts look at ingoings, outgoings, and potential changes in the industry landscape and help a business to prepare accordingly.

“Think of your business’s budget as your go-to guide for how you’re going to do things. A thorough plan gives a thorough overview of where your money has been spent in the past, and how you’ll use this knowledge to plan where to allocate funds in the future.

Be flexible

“Keeping your forecast flexible means you have room to change, expand and deviate slightly if you need to. The business world changes rapidly, and the landscape can shift at a moment’s notice. If your budget is unable to adapt to these changes, you might find that your business will struggle. Remember, a forecast is made up of best guesses. Your situation may change, so you should be prepared to alter your financial plan in line with your business.

“Another helpful tool is to use a business credit card. This can help to streamline cash flow management for SMEs, while a line of credit can help cover unexpected costs that aren't accounted for in your budget."

Create a detailed budget

“Breaking down your budget into specific sections is essential - the more specific, the better. Be realistic with your estimates, and use your past spending patterns to inform your decisions.

When separating your finances by various teams, delegating responsibility is important. There is nothing more valuable than having several sets of eyes on something as detailed as a budget. The goal is for your plan to work as a cohesive whole in addition to satisfying each team’s needs."

Re-forecast regularly

“As mentioned, where you allocate your business’s funds is likely to change throughout the year. Small business owners can keep up with the constantly evolving landscape by reviewing performance regularly. As shown in our survey 30% of people review their budgets once a month, and this is a solid starting point.

Keeping an eye on your business’s spending patterns and adjusting accordingly can help prepare you for the year ahead by proactively managing deviations to budget before they hurt your cashflow."

Create a contingency fund

“A contingency fund is essentially a buffer that can be used to cover any unanticipated expenses. It might seem unnecessary at first, but it gives you peace of mind that you’re ready for any unexpected changes and have something to fall back on.”