Master BudgetA comprehensive financial document that combines all the other lower-level budget plans

Budgeting is a complicated yet rewarding process if done properly.

With a budget, a business will have an easier time managing its finances.

It will have a guideline on how much sales it should be making, how much it should be spending in order to make a profit, etc.

A budget will also give an idea of what the business’s financial statements would look like.

Well, that is if the business sticks to the budget.

Also, a budget can help with cash flow management.

Overall, a budget is a very useful financial tool that can help a business create financial stability.

I mentioned a lot of things that a budget, didn’t I?

Well, that’s because the “budget” I’m referring to here is the master budget.

In actuality, there are different types of budgets that make up the master budget.

There’s the sales budget that provides target figures for future sales.

There’s the administrative budget that provides target figures for operating expenses.

Let’s not forget the budgeted financial statements that sort of summarize all the other budgets that make up the master budget.

Sounds like a lot, huh? I did say that budgeting is a complicated process.

In this article, we will be talking more about the master budget.

Properly learning about it can make it easier for you to understand the benefits that it can give to your business.

Let’s explore its various components and learn what their functions are.

We’ll also be learning the steps to creating and using your very own master budget for your business.

A master budget, if done properly, can greatly help a business in creating financial stability after all.

You’d want that for your own business.

With, that, let’s get it started!

What is a Master Budget?

A master budget is a comprehensive financial document that aggregates all the lower-level budgets produced by a business’s various functions/departments.

It typically includes operating and financial budgets.

Aside from that, a master budget also includes budgeted financial statements, as well as a cash forecast.

It may also include a financing plan.

The operating budget provides target figures for the income-generating activities of the business.

This typically includes revenues, costs, and expenses.

Aside from that, they may also include details that you wouldn’t find in a typical income statement such as the number of units to be sold, the number of units to be produced, the amount of raw materials to be used, etc.

The compiled operating budgets will produce the business’s budgeted income statement.

The financial budget provides target figures for cash inflows and outflows, as well as other elements that affect the business’s financial position.

It will include plans regarding the business’s operating cash flow.

It will also include cash flow plans for financing and investing activities.

The compiled financial budgets will produce the business’s budgeted balance sheet and budgeted cash flow statement.

In most cases, the process of preparing the master budget involves feedback and revision from employees at different levels.

It is the rank-and-file employees that do the actions to achieve the target figures of the master budget after all.

However, senior management usually has the final say in the approval.

Customarily, the senior management will review the master budget and then recommend modifications.

However, in some cases, the master budget may be imposed with minimal to no participation from the other employees.

Presentation of Master Budget

A master budget is typically presented in a monthly or quarterly format.

Also, it will usually cover one fiscal year, although there are some cases where it can cover multiple periods.

The budget preparer may include text explanations to make understanding and following the master budget much easier.

The text may explain the business’s strategic decisions, as well as how the master budget can help in reaching strategic goals.

It may also include the necessary management actions to successfully implement the master budget.

The Master Budget Process

The preparation of the master budget usually happens later in the financial planning process.

The master budget is a compilation of the various budgets, so its preparation won’t start until the business has already decided on its goals and expectation for the operational and financial performance for the upcoming year.

Once the necessary pieces are in place, the master budget process will start with the following steps:

Prepare the individual budgets

The master budget process actually starts with the creation of its components.

The business’s accountant and department heads collaborate to create individual budgets that contain relevant information for each of the business’s sections.

For example, the individual budget for the HR department will include an expense plan as well as target goals and expectations for new hires and employee retirements.

Usually, the sales budget is the starting point in the preparation of the master budget.

Sales/revenue is the first line item that you’ll find on a business’s income statement.

Setting it first will make the preparation of the other income statements below it much easier.

Compilation of the individual budgets into the master budget

After all the necessary individual budgets are created, it’s to compile them all into the master budget.

This step will include the creation of the budgeted financial statements that include data from the various individual budgets.

This step may also include text explanations and notes that make following the master budget easier.

Submit for feedback and revisions

After preparing the draft master budget, the next step is to submit it to the senior management for review and feedback.

The senior management will then recommend modifications that make the master budget to be more in line with the strategic goals of the business.

The accounts will then apply the recommended modifications to the master budget.

This process will repeat until the senior management approves the most recent iteration of the master budget.

Approval and implementation of the master budget

When the executives approve the master budget, the next step is its implementation.

The various department heads, and accountants will then use the master budget as a guide for the business performance for the year.

Periodically, the master budget will be compared with the business’s actual performance to gauge whether it is underperforming, performing better, or just performing within the budget.

What’s Included in a Master Budget?

The master budget is a compilation of the lower-level budget prepared by the business’s various departments.

Some businesses may not use a type of budget due to the nature of their operations.

For example, a pure service business will not use production budgets as it does not have any products to account for.

The budgets compiled into the master budget may be categorized into two main sections: operating budget, and financial budget.

Operating budget

The operating budget details the set target for the income-generating activities of the business.

Here are some examples of the budgets included in the operating budget section of the master budget:

• Sales budget
• Production budget
• Manufacturing budget
• Purchases budget
• Cost of goods sold budget or Cost of sales budget
• Operating expenses budget
• Budgeted income statement

The operating budgets are prepared first as they contain information needed for the generation of the financial budget. Speaking of…

Financial budget

The financial budget details the target/forecasted cash inflows and outflows as well as other factors that affect the business’s financial position.

The financial budget section of the master budget includes the following:

• Cash budget or Budgeted cash flow statement
• Budgeted balance sheet
• Capital expenditures budget