Who it's for: anyone in a SaaS or tech finance team who runs, supports or contributes to the annual budget, from pulling the data to presenting the final version.
What you'll get: a budget timetable, a step-by-step process from ARR to P&L to cash, a worked example with headcount costing and a prepayment journal, common mistakes, and copy-ready AI prompts.
Reading time: about 13 minutes. Ideally before the first budget kick-off meeting, not after.
Why a clear process matters
Budget season has a habit of turning into twelve versions of the same spreadsheet, each emailed with "final" somewhere in the file name. A clear process with fixed inputs, owners and deadlines cuts out most of that. In SaaS, it also means the budget starts from the thing that drives everything else: recurring revenue and the people needed to win and serve it.
Key terms
- Top-down: leadership sets the targets (for example ARR growth and burn) and the budget is built to meet them.
- Bottom-up: each department builds its own costs and plans, and finance adds them up.
- Driver-based budget: numbers calculated from a few key inputs (such as new ARR per salesperson or hosting cost per customer) rather than typed in line by line.
- Phasing: how annual numbers are spread across the months.
- Fully loaded cost: salary plus employer costs such as employer National Insurance, pension, benefits and equipment.
- Budget owner: the person responsible for a department's budget and for explaining variances against it.
- Three-statement budget: a budget that covers P&L, balance sheet and cash flow, linked together.
A typical budget timetable
For a December year-end, many SaaS teams start in September and approve in December. Shift the dates to suit your year-end and board calendar.
| When | Stage | Output | Where AI helps |
|---|---|---|---|
| Week 1 to 2 | Agree targets and assumptions with leadership | One-page assumptions sheet: ARR growth, churn, burn limit, hiring envelope | Summarising last year's actuals and trends |
| Week 2 to 3 | Send templates and the timetable to budget owners | Each owner knows what to submit and by when | Drafting the instructions email and FAQ |
| Week 3 to 5 | Build the revenue and headcount plans | ARR bridge by month; hiring plan with start dates | Checking hiring plans for gaps and duplicates |
| Week 5 to 6 | Department submissions and finance review | Non-payroll costs by department and month | Comparing submissions with last year's run rate |
| Week 6 to 7 | Consolidate: P&L, cash and balance sheet | First full draft | Flagging lines with unusual growth |
| Week 7 to 9 | Challenge rounds and scenarios | Agreed version with base and downside cases | Drafting scenario narratives |
| Week 10 | Board approval and loading | Approved budget loaded into the ledger or reporting tool | Checking the loaded budget agrees to the approved file |
The budget, step by step
Step 1: lock the starting point
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Agree the latest forecast for the current year | Expected year-end ARR, cash and headcount agreed with leadership |
| ☐ | Get the current headcount list from HR and payroll | One list, agreed between HR and payroll, with salaries and departments |
| ☐ | List contracted costs for next year | Rent, key software, hosting commitments and other contracts with renewal dates and prices |
| ☐ | Write the assumptions sheet | Pay rise budget, employer cost rate, churn, price changes, FX rates, all on one page |
Step 2: build revenue from ARR
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Start from expected opening ARR | Agrees to the current-year forecast |
| ☐ | Budget new ARR from sales capacity | Linked to the number of ramped salespeople and a realistic target per person |
| ☐ | Budget expansion, contraction and churn | Based on actual rates over the last 12 months, with any changes explained |
| ☐ | Convert ARR to monthly revenue | Revenue phased by month from MRR, plus services and usage revenue separately |
| ☐ | Plan billing and cash timing | Annual versus monthly billing mix reflected in the cash budget |
Step 3: build headcount
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Roll forward existing staff with pay rises from the agreed month | Each person costed monthly |
| ☐ | Add new roles with realistic start dates | Each role has a department, salary band and month; recruitment time allowed for |
| ☐ | Add employer costs | Employer National Insurance, pension and benefits using current rates checked on gov.uk |
| ☐ | Add commissions and bonuses | Linked to the revenue plan and bonus scheme rules |
| ☐ | Reconcile headcount totals | Opening + hires − leavers = closing, by department |
Payroll is usually the biggest cost in a SaaS budget, so this step deserves the most checking. Employer National Insurance and pension rates change, so check the current rates and thresholds on gov.uk when you set the assumptions, rather than copying last year's.
Step 4: non-payroll costs
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Budget hosting from usage drivers | Cost per customer or per unit of usage, linked to the revenue plan |
| ☐ | Budget software per head and contract | Per-seat tools linked to headcount; annual contracts at renewal price |
| ☐ | Budget marketing by programme | Spend linked to pipeline targets where possible |
| ☐ | Budget professional fees, rent, insurance and other G&A | Each line has a basis (contract, quote or last year plus a reason) |
AI shortcut: give an approved AI tool the last 12 months of supplier spend by department and each budget owner's submission. Ask it to list suppliers that appear in actuals but not in the budget, and lines where the budget is more than 20% above or below the run rate. You get a ready-made challenge list for each owner.
Step 5: consolidate, check and stress-test
| Task | What "done" looks like | |
|---|---|---|
| ☐ | Build the P&L, cash flow and balance sheet | Balance sheet balances every month; cash ties to the cash flow |
| ☐ | Check the key SaaS metrics | Gross margin, net revenue retention, burn and runway all look credible against history |
| ☐ | Run a downside case | For example lower new ARR and higher churn, showing the effect on cash and runway |
| ☐ | Keep a version log | Each version numbered, dated and summarised in one line |
Worked example: MonthEndClub Co Ltd's budget for next year
MonthEndClub Co Ltd is a fictional UK SaaS company with a December year-end.
The ARR plan (£k).
| ARR bridge, budget year | £k |
|---|---|
| Opening ARR, 1 January | 5,100 |
| New customers | 1,200 |
| Expansion | 500 |
| Contraction | (150) |
| Churn | (400) |
| Closing ARR, 31 December | 6,250 |
Churn of £400k is 7.8% of opening ARR (£400k ÷ £5,100k). Net revenue retention is about 99.0%: (£5,100k + £500k − £150k − £400k) ÷ £5,100k = £5,050k ÷ £5,100k. Checking these against last year's actual rates is a quick test of whether the plan is realistic.
If ARR grows evenly through the year, subscription revenue is roughly the average of opening and closing ARR: (£5,100k + £6,250k) ÷ 2 = £5,675k. In practice, phase it month by month from the MRR plan, because new deals are rarely spread evenly.
The summary P&L (£k).
| £k | Budget |
|---|---|
| Revenue | 5,675 |
| Cost of sales (20% of revenue) | (1,135) |
| Gross profit (80%) | 4,540 |
| Sales and marketing | (2,400) |
| Research and development | (2,300) |
| General and administrative | (1,100) |
| Total operating costs | (5,800) |
| EBITDA | (1,260) |
Costing three new hires. The plan adds three engineers at £70,000 salary each, starting 1 April. That's nine months in the budget year.
| Calculation | £ |
|---|---|
| Salary: 3 × £70,000 × 9 ÷ 12 | 157,500 |
| Employer costs at an illustrative 20% (employer NI, pension, benefits) | 31,500 |
| Fully loaded cost in the budget year | 189,000 |
The 20% is an example only. Build your own rate from current employer National Insurance rates and thresholds (check gov.uk), your pension scheme and your benefits. The full-year cost the following year is £252,000 (3 × £70,000 × 1.2), so it's worth showing that "run rate" next to the budget-year figure.
P&L budget vs cash budget: an annual prepayment. MonthEndClub Co Ltd pays £24,000 plus VAT in January for a 12-month software licence. The P&L budget shows £2,000 a month. The cash budget shows £28,800 going out in January (including £4,800 VAT, which is reclaimed on the next VAT return).
| January: pay the invoice | Dr | Cr |
|---|---|---|
| Prepayments | £24,000 | |
| VAT input tax | £4,800 | |
| Bank | £28,800 |
| Each month: release one twelfth | Dr | Cr |
|---|---|---|
| Software costs | £2,000 | |
| Prepayments | £2,000 |
A budget that only phases the P&L will miss the January cash dip. That's why a three-statement budget is common practice even for small teams.
If you report under US GAAP (ASC 606)
Budgets are internal, so the framework mostly matters for revenue timing. For standard subscriptions, IFRS 15 and ASC 606 usually give the same monthly revenue. Differences are more likely with capitalised development costs, leases and some contract costs, so groups with a US GAAP parent often budget those lines on the group's basis.
Common mistakes
- Budgeting revenue without sales capacity. New ARR targets that need more ramped salespeople than the hiring plan provides.
- All hires starting in January. Recruitment takes time. Realistic start dates often move a large share of cost into later months.
- Last year's employer cost rate. National Insurance and pension rules change. Check current rates on gov.uk when setting assumptions.
- No cash or balance sheet. A P&L-only budget hides VAT timing, annual billing and prepayments.
- Too many versions, no log. Without a version log, nobody knows which changes were agreed.
- Budget not loaded properly. The approved file and the budget in the reporting tool don't agree, so every variance report is wrong from January.
- Unchecked AI challenge lists. AI can misread spreadsheets or mismatch suppliers. Check its findings against the source, and only use company-approved AI tools with payroll and supplier data.
Tools that can help
Many smaller teams budget in Excel or Google Sheets, with actuals exported from Xero, QuickBooks, Sage or NetSuite. Dedicated planning tools can help as the team grows, mainly by managing versions, collecting submissions from budget owners and linking P&L, balance sheet and cash. Cash tools such as Float can help with the cash phasing. A company-approved AI assistant helps with challenge lists and drafting. None of these replace clear assumptions, owners and a version log.
AI prompts to try
Use only AI tools your company has approved for financial and payroll data. A person checks every output.
1. Run-rate check. "Here are the last 12 months of costs by department and supplier, and the budget submissions for next year. List every supplier in actuals that's missing from the budget, and every line where the budget is more than 20% above or below the last three months' run rate." Give it: both exports. Check: a sample of flagged suppliers against the ledger.
2. Hiring plan sense check. "Here's the hiring plan and the current headcount list. Flag duplicate roles, roles with no salary band, start dates in the first month of the year, and any department where headcount grows more than 30%." Give it: both lists, without personal details beyond role and salary. Check: each flag with the budget owner.
3. Assumptions summary. "Turn this assumptions tab into a one-page summary for the leadership team, in plain English, with each assumption next to last year's actual." Give it: the assumptions tab and last year's actuals. Check: every number against the model.
4. Downside narrative. "Using these base and downside numbers, write a short paragraph explaining what changes, the effect on cash and runway, and the main decision points." Give it: the two scenario summaries. Check: runway and cash figures against your model.
Key takeaways
- Agree targets and assumptions on one page before anyone builds anything.
- Start revenue from an ARR bridge linked to sales capacity and real churn rates.
- Cost headcount carefully with realistic start dates and current employer cost rates.
- Build P&L, cash and balance sheet together so timing differences show up.
- Keep a version log and check the loaded budget agrees to the approved one.
- Use AI for challenge lists and summaries; people make the calls and sign off.
FAQs
Should a SaaS budget be top-down or bottom-up?
Many teams use both: leadership sets targets top-down, departments build plans bottom-up, and the challenge rounds close the gap between the two.
How detailed should the budget be?
Detailed enough to track against monthly. A common approach is department by nominal account by month, with headcount by person or role.
How do you budget revenue for a new product?
Typically as a separate line with its own assumptions, so it can be tracked and adjusted without affecting the core plan.
Can AI build the budget?
It can speed up parts of it, like spotting gaps in submissions, summarising assumptions and drafting scenario write-ups. The model structure, assumptions and approval stay with people, and only company-approved AI tools are given payroll and financial data.
What if the budget is out of date by March?
That's what reforecasts are for. Many teams keep the budget fixed for accountability and track a separate latest forecast.
Related guides
- Reforecasting Without the Pain
- How to Build an ARR Bridge (New, Expansion, Contraction, Churn)
- Burn, Runway and the 13-Week Cash Forecast
- Payroll Journals and Bonus Accruals at Month-End
More in Busy Season guides.
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This guide is general information about common practice. It isn't tailored to any business, and standards, tax rules and figures change. Check your own circumstances, the latest rules and, where needed, a qualified professional before acting.
Last reviewed: October 2026.