A single, comprehensive budget may be created by consolidating and organising other more specific budgets. You will be able to get a thorough picture of the financial state of your company in this manner. For example, the budgets for marketing and Human Resources and those of other departments will be combined into a single budget. The term “master budget” refers to this particular budget. Because there is just one budget, it is often considered to be a significant amount. However, this is the ongoing financial plan, as well as the overview of the divisional budget. It is a common misconception that the whole company’s budget falls under this category.
Did you know? Master budgets impact a company’s performance. The master budget is a good predictor of near-term corporate expectations.
What Exactly Does “Master Budget” Mean?
What is a master budget? The plan for the finances, the master budget, which documents everything, comes at a high cost and will be used to perform the following – the production levels, the anticipated future sales, the incurred future costs, the capital investments combined with the repaid and acquired loads.
In other words, when looking at the master budget meaning, it consists of a budgeted income statement, a balance sheet, and all of the different financial budgets. In addition, it incorporates the organisation’s financial planning, planned profit and loss account, cash flow prediction, and balance sheet. Businesses often create an annual master budget, also called a business budget, to ensure the finances are planned well.
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Example of a Master Budget
If you are concerned about the future direction the firm will go, you should focus on the master budget. This is because the budget serves as a strategic plan for the organisation, and the corporation documents all of its activities. The documentation process is carried out to forecast the company’s future.
The following is an example of a master budget. The merger and acquisition procedure aids in analysing the company’s profits. In this stage of the process, the firm is going through the M&A procedure, and the development of the master budget will assist in determining the profits that the organisation has made. This comes from the deal that was completed with the target firm that was purchased.
Consider, for instance, the departments in any given organisation.
Administration and Human Resources are two departments that are essential to every company and serve as cornerstones of the business. When someone purchases a firm, the effect will be hiring two individuals who fall into the same employment category.
Now it’s the time to plan the organisation, and the corporation must select the individual who is the most appropriate for the company. When deciding which employee to retain in the company, they are required to consider a many aspects, including the potential for the firm to improve and other details.
The creation of the company’s budget, which includes all of the expenditures and revenues, is currently the responsibility of the company’s management. Now that the master budget has been created, the organisation may make decisions based on the information or data it provides. This information helps provide a more in-depth picture of the business’s future financial statements. In addition to the financial statements, there is also an assessment of the current loan rates, debt limitations, and cash flow.
Types of Master Budget
A master budget is composed of two distinct sections, i.e. budgets for operations and budgets for finances.
Operational Budget
In the master budget process, the operational budget includes an additional notion known as the sales budget, which is listed below the operating budget.
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Sales Budget
This budget may be considered to be the cornerstone of the overall budget. When it comes to sales, there are needs for the employees, expenses associated with administration, and expenditures related to procurement. The first thing that has to be done to create this sales budget is to derive the number of sold units, followed by deriving the price or the cost. Calculating the total value of the sale is done in this manner. To properly prepare the sales budget, it is necessary to consider a few different criteria, and a list of these factors is provided below.
- Market demand estimate
- Current facility for providing supplies
- Either a capacity for production or a facility for infrastructure
- Analysis of the market
Budget for the Production
The sales budget determines the production budget, and several criteria have to be taken into account in addition to those, including the inventory, the made units, and the annual stock of the buffer.
Cash is a significant asset, and it is necessary for all types of divisional budgets. This is necessary to ensure that the company does not lack cash. The lack of good planning or the creation of a budget may put you in a position where you are short on cash.
What exactly is the situation with the scheduled payment and the anticipated receipts?
When both the production and sales budgets are included, it is possible to derive the production and sales expenditure budgets. There is an analysis done on the receipt, as well as on the customer’s payment cycle. This is the point in the procedure or the stage of the process when the organisation or the corporation will determine whether or not to borrow money from outside sources, also known as external borrowing.
Financial Budget
Another section of the master budget is the financial budget, which contains another budget titled the capital asset purchase budget. This budget is included in the financial budget.
Also read: What is Financial Accounting – Definition, Methods & What does it Deal with
Maintenance is essential in every organisation or business and is the most critical component. For the machine, plant, and any instruments or equipment to function correctly, they must be appropriately maintained. If there is a sales objective, and if that target is greater than the amount of time or period that was the prior one, it is time to present the new one.
Therefore, the financial plan will play a significant part in this aspect.
Statement of Income According to the Budget
The budget’s revenue statement is created by considering the budgets that have been stated before. This will include the specifics and total, which may be found in the following table.
|
Item |
Amount |
|
Income that is made the budget |
– |
|
Budgeted profitability |
– |
|
Budgeted Expenses that are low |
– |
When the revenue statement of the budget has been prepared, only then will this balance sheet of the budget be completed as part of the preparation. The following information, in addition to the total, shall be included on this page.
|
Detail |
Amount |
|
Assets with the budget |
|
|
Plants & Machinery |
– |
|
Accounts receivables |
– |
|
equipment |
– |
|
Inventory |
– |
|
Total |
— |
|
Liabilities that are in budget |
|
|
Capital that is shared |
– |
|
Accounts payable |
– |
|
Retained Earnings |
– |
|
loans that are for a short period |
– |
|
Income tax payable |
– |
|
Long-term loans |
– |
|
Total |
— |
Also read: Learn about Inventory Accounting – Meaning, Objectives, Types & Method
There is a connection between the departments’ separate budgets and the overall budget. If a mistake is made when producing any budget, that mistake will be transferred into the overall master budget. Consequently, it is recommended to create a budget that is as difficult as is humanly feasible while at the same time being attainable.
Conclusion
When you define a master budget, the budget serves as the primary instrument for the corporation’s overall planning process. This is used as a yardstick to evaluate the performance of the responsibility centres. It is common practice for the senior management team to conduct an iterative review of the primary or master budget. This will be helpful in modification and evaluation up to the arrival of the budget that will allocate money for the attainment of projected or wanted outcomes.
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