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Budgeting is an essential function of any business, necessary for both financial planning and growth. A master budget gathers a company’s lower-level budgets and incorporates them into one central document for ease of reference. Keep reading for a closer look at what’s included in a master budget, as well as how to use it.
What does master budget mean?
The term “master budget” refers to a comprehensive document that includes a variety of different smaller budgets. It brings these individual budget templates together into one master template. A master budget will show all the details of the company’s income-generating actions via the operating budget, with an overview of revenue and expenses. It will also show cash inflows and outflows from the cash flow statement, and estimations of what will appear on the balance sheet at the end of the accounting period.
How does a master budget work?
Master budgets are prepared as part of small business accounting, usually on a monthly or quarterly basis to cover the full fiscal year. Companies might tack on extra months to the end of the budget to keep it rolling forward, a process called continuous budgeting.
In addition to the budgeted financial statements, the master budget also showcases a financing plan and cash flow forecast. Some businesses will include a statement of purpose to explain how the master budget fits into the business’s future financial goals. There is a great deal of flexibility within the document, as it’s used by the company’s management to make planning decisions. The budget director is responsible for maintaining this document, using input from various departments and employees.
What should be included in a master budget?
Although each business can tailor the master budget to suit its own goals, there are a few common elements you’re likely to see.
The sales budget is created based on figures from the business’s sales forecast.
The direct materials purchases budget lists the raw materials needed for production. This section will also include other direct costs, including labor costs as well as fixed and variable overhead costs.
The cost of goods sold budget uses the finished goods inventory budget to estimate how much it will cost to complete each sale.
The cash budget will list all cash inflows and outflows, investments, and expected liabilities.
The administrative budget details any expenses that aren’t related to manufacturing.
The capital expenditures budget shows the cost of large, fixed assets like property and machinery.
The budgeted balance sheet shows the assets, liabilities, and equity that will appear on the balance sheet if the budget is followed.
Are there any challenges to using a master budget?
As you can see, the master budget is quite comprehensive, giving a detailed account of all expected cash inflows, outflows, and wider expenses. However, it’s not always entirely accurate. One issue that can crop up is the fact that some figures are more difficult to estimate than others. For example, net change in working capital can fluctuate, particularly during periods of rapid growth. Budgeting for inventory can also present a challenge. With more sales, there’s a higher need for more inventory – which can lead to negative cash flows before the resulting payments come in.
These are factors that need to be considered when calculating the master budget. Another is the use of the master budget for employee goal setting and incentives. If management incentivizes sticking to the budget with bonuses, it could drive employees to low-ball their estimated sales and go too high with estimated expenses. This gives more room for error than necessary in meeting these targets. It’s important to keep this in mind when gauging the accuracy of any master budget – particularly if it involves input from multiple departments.
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