Let’s be honest: The vast majority of small businesses don't need formal budgets or sales forecasts.

Most business owners are entrepreneurial by nature and do just fine without them. However, if you're fortunate enough to have a growing business, or you think you might want to apply for a bank loan or seek outside capital in the near future, then you might be at the point where you need to create a budgeting process.

If you’ve never created a budget before, the idea can feel daunting. Where do I start? What information do I need? How can I come up with accurate forecasts?

The good news is that budgeting and forecasting aren’t as hard as most people think. In fact, the overall process can be boiled down to three basic steps:

Step 1: Look back at your financial history

The starting point for any budget or forecast is to gather your financial results for the past 2-3 years and lay them on the table. Unless you’re launching a new business from scratch (in which case there’s no data to look at), this will serve as your foundation and provide the baseline for what’s going to happen next year. As the old saying goes, “Past results are the best predictor of future performance.”

Step 2: Write down a few reasonable assumptions

Next, take a step back and make a few educated guesses about what's going to happen with your business next year. Don’t worry about crunching any numbers yet, just start by asking yourself some basic questions. Is the market for your products increasing or decreasing? What do you think your sales growth will be? Will you face any big expenses in the near future?

Trust your instincts and try not to overanalyze. Most business owners have a strong sense of intuition about these things.

Step 3: Forecast your expected revenues and expenses

This step takes a little time, but it’s not as difficult as it sounds. The basic idea is to take your historical financial data in one hand and your forward-looking assumptions in the other, then use them to forecast your expected revenue and expenses for the next twelve months. The result is a projected P&L, which will serve as your operating budget for the coming year.

One last idea. When it comes to sales, it's often useful to prepare two different forecasts: a conservative one and an aggressive one. Why? Because most entrepreneurs constantly fluctuate between a safe sales projection (what they know they can get) and a more optimistic outlook (what they hope will happen if everything goes well). The truth often ends up somewhere in between, so it can be helpful to look at both scenarios.