What is a Master Budget?

Budget provides comprehensive financial overview of planned company operation. A company’s objectives budget is the overall financial plan showing expenditure of the available funds. A company’s budget is driven by the aims and objectives of the company as well as what it can actually accomplish. Many variables in a business can be budgeted which includes sales, output, cost- (variable and fixed), profits, cash flow, capital investment. Budget should be SMART, that is specific, measurable, achievable, realistic, and with time bound otherwise budget will be ineffective.

Strategic objective of the company is the first factor that needs to be considered when formulating budgets because unaligned budget with strategic objective lead to failure. The next step of budgeting is identifying the limiting factor that the organization is faced with which is known as constraint which may be a limit on the number of goods a business could sell (demand is limiting factor) or on the number of hours a particular type of skilled workforce could work etc. Once organization identifies the limiting factor they set the budgetary principle. The next step is assessment and coordination of internal factors i.e. capabilities of employees and resources and draft departmental budget. After this step the organization should assess the external influencing factor such as forecasted economic, political and global environment which helps to minimize the risk associate with budget. Finally company need to coordinate the entire departmental budget i.e. sales budget, production budget, material budget, labor budget, overhead budget which is known as master budget.

The master budget is a summary of a company’s plans that sets specific targets for sales production, distribution and financing activities which generally culminates in a cash budget, a budgeted income statement and a budgeted balance sheet.

Master budget starts with sales forecasting which can be done by in-depth analysis of past sales trend, estimation made by the sales forces, general economic condition, competitor’s actions, change in the firm’s prices, change in product mix, market research, advertising and sales promotion plans. Sales forecasting leads to the sales budget that is a detailed schedule showing the expected sales for the budget period. It can be expressed in units and currency both. The sales budget is the main pillar of the master budget. The next budget is production budget which determines quantity of production depends upon the number of units to be sold and upon the number of units in the ending and opening inventories. Another component of budget is material budget which shows the quantity and cost of purchasing material for planned production and inventories. Labor budget shows the budget for all type of labor i.e. skilled and unskilled which depend upon the level of production. Another budget is the overhead budget that shows quantities of a large number of items of costs i.e. salary, electricity, rent, administrative expenses. After this organization prepare projected income statement, cash budget: inflow and outflow of cash and budgeted balance sheet.

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