Budgets are crucial for the financial management of micro and small companies.
They state priorities for following time span and assign their monetary value. Naturally, no one wants to see their budget cut.
Budgeting ensures that resources are used wisely, both in terms of where and when they are spent. It helps you figure out which areas of your company are most important right now and which can wait.
When creating a budget, you give yourself or your department heads a clear idea of how much can be spent. This helps you plan for future expenses and unexpected costs, ensuring your business stays on track financially.
There are two ways of dealing with a budget. You either take previous expenses, increase, or decrease by a coefficient (depending on your view of the department) and let it be for a next year. This one is called incremental budget. It's very easy to implement but doesn't give much insight.
Or you create your budget from the ground up, building it expense by expense, one contractor, and employee after another. This one is called zero-based budget. This is very useful when planning to overhaul current procedures or when you need a detailed understanding of your costs.
Some expenses are fixed and can't be easily changed, like rent. However, other expenses, such as marketing or employee outings, can be adjusted more flexibly. Understanding the difference between fixed and variable expenses is key to effective budgeting.
In conclusion, budgeting is vital for micro and small companies. It prioritizes spending, allocate resources effectively, and plan for future expenses, ensuring financial stability and supporting long-term growth.