What is a Master Budget?
Definition: A master budget is a document that details all expected sales, production levels as well as future expenses and purchases, among other things.
Departments in large organizations prepare budgets and hand them over to the finance or accounts department for consideration. Aggregation of divisional budgets gives rise to what is often referred to as a master budget.
A master budget includes all financial budgets in a business or a company inclusive of the budgeted income statement and balance sheet. The statement documents all aspects of a company’s operations as well as future predictions. The document also provides valuable information on management’s strategic plan for the future.
Covering a company’s entire fiscal year, the master budget is often presented as either monthly or quarterly format. The budget may come with an explanatory text, detailing a company’s strategic direction or how the master budget will help the business accomplish specific goals. It may also include actions management intends to take to achieve the budget.
Conversely, a master budget acts as a central planning tool for high-level management teams. It is common for senior management teams to review iterations to the master budget in a bid to incorporate various modifications to achieve desired results.
Preparing a Master Budget
The first step to preparing a master budget involves the preparation of a sales budget. As a foundation to the final budget, a sale budget includes procurements, staff requirements as well as administration costs. The sales budget is prepared, taking into consideration, market demand estimation as well as production capacity and current supply facility.
Once a sales budget is prepared a production budget follows suit taking into considerations inventory at the beginning of the year, inventory maintained at the end of the year as well as number of units manufactured and buffer stock to be maintained.
A capital asset acquisition budget follows suit after the preparation of sales and production budget as it factors the cost of maintaining and replacing any machinery and equipment used in production. Capital asset acquisition budget is, therefore, paramount to planning for a capital asset.
A cash budget is at the heart of any master budget as it helps ensure there is free circulation of cash to all departments throughout the year. While preparing a cash budget, all administration expenses pertaining to interest on borrowing, staff costs, office rent as well as legal expenses and office supplies are considered.
Master Budget Uses
A master budget is a crucial planning tool that helps top-level management plan and allocate resources accordingly for the whole year. Likewise, it is used in estimating the overall profitability as well as asset and liability position.
Being an aggregation of budgets from various departments, a master budget can act as an important tool for measuring the overall performance. Likewise, it helps in departmental control while also ensuring accountability when it comes to resources utilization.
A master budget also enhances coordination between different divisions when it comes to the utilization of various resources
Master Budget Pros and Cons
Advantages
A master budget being a draft of how businesses are likely to perform on the utilization of various resources can help act as an important motivation tool. By comparing actual performance and budgeted performance, employees can ascertain areas that need more effort for improved outcomes.
The fact that it is prepared at the beginning of any financial year makes it possible to detect any problems or challenges that might come calling in advance. Likewise, top management and employees can adjust adequately to ensure a business achieves the desired results
Disadvantages
While preparing a master budget, employees might estimate low sales and high expenses so that they can achieve set targets and earn compensation.
A master budget is highly rigid. Likewise, it is impossible to make small additions or slight changes to the final draft even if they have the potential to have a significant impact on performance. The inclusion of lengthy and detailed charts means they are not easy to understand from a nonprofessional perspective.
Summary
A master budget is essentially a statement that integrates budgets from various departments detailing all activities as well as expenses to be incurred in a given financial period.