How to Prepare a Master Budget with All Components?

A master budget is an essential tool for financial planning. It is a detailed plan that shows all anticipated income and expenses for a specific period. The master budget can be used for organizations of any size, from small businesses to large corporations. There are many benefits to using a master budget. In this article, we will discuss what a master budget is, the different components of a master budget, how to prepare one, and the benefits of using one.

What is a Master Budget?

A master budget is a comprehensive financial plan that includes all income, expenses, and capital expenditures for a specific period. The budget period is typically one year but can be shorter or longer depending on the organization’s needs. The master budget is created using historical data and forecasts of future conditions.

Master Budget Components

The master budget has several different components.

1. Sales Forecast

The first is the sales forecast, which predicts how much revenue the organization will generate in the budget period. The sales forecast is based on historical sales data, market trends, and expected changes in the economy.

2. Production Budget

The second component is the production budget, which estimates how many units of product or service will be required to meet the sales forecast. The production budget takes into account the company’s desired level of inventory, as well as expected changes in demand.

3. Direct Materials Budget

The third component is the direct materials budget, which estimates the cost of raw materials needed to produce the number of units forecast in the production budget. The direct materials budget includes both the cost of the raw materials and the cost of any labor required to acquire them.

4. Direct Labor Budget

The fourth component is the direct labor budget, which estimates the cost of labor needed to produce the number of units forecast in the production budget. The direct labor budget includes both wages and benefits.

5. Factory Overhead Budget

The fifth component is the factory overhead budget, which estimates the cost of all indirect expenses associated with production. Factory overhead includes costs such as rent, utilities, and property taxes.

6. Selling and Administrative Expense Budget

The sixth and final component of the master budget is the selling and administrative expense budget, which predicts the cost of all selling and marketing activities and general administrative expenses. The selling and administrative expense budget include salaries, advertising, and office supplies.

Master Budget Statements

A master budget is a tool that organizations use to plan their spending and track their progress towards financial goals. The budget includes both operational and capital expenses.

The master budgeting process begins with reviewing the organization’s financial goals and ends in preparing three projected financial statements. Those are projected cash flow statements, income statements, and budgeted statements of financial position.

1. Projected Cash Flow Statement

The cash flow statement shows how much cash the organization expects to receive and spend over some time. It is important to note that the cash flow statement is different from the income statement. The income statement only considers revenue that has been earned, while the cash flow statement includes all revenue, regardless of whether it has been earned yet.

The cash flow statement has three main sections: operating activities, investing activities, and financing activities.

  1. Operating Activities: Operating activities are the day-to-day expenses necessary to run the organization. This includes things like rent, utilities, salaries, and inventory.
  2. Investing Activities: Investing activities are related to the purchase or sale of long-term assets. This could include things like buying new equipment or selling old equipment.
  3. Financing Activities: Financing activities involve the organization’s sources of financing, such as loans and equity investments.

2. Budgeted Income Statement

The budgeted income statement shows the organization’s expected revenue and expenses over some time. This statement is crucial because it helps the organization track its progress toward financial goals.

The budgeted income statement has two main sections: operating and non-operating expenses.

  1. Operating Expenses: Operating expenses are necessary to run the organization. This includes things like rent, utilities, salaries, and inventory.
  2. Non-Operating Expenses: Non-operating expenses are not necessary to run the organization. This could include things like advertising or research and development.

3. Budgeted Balance Sheet

The budgeted statement of financial position shows the organization’s expected assets and liabilities at a specific time. This statement is crucial because it helps the organization track its progress toward financial goals.

The budgeted statement of financial position has two main sections: assets and liabilities.

  1. Assets: Assets are those that the organization owns and can use to generate revenue. This could include things like cash, accounts receivable, and inventory.
  2. Liabilities: Liabilities are those that the organization owes to others. This could include things like loans and accounts payable.

The budgeted balance sheet is one of the essential master budget components. It lists all of the company’s assets and liabilities at a specific time. This information is used to create the company’s financial statements.

The budgeted balance sheet includes three sections:

  1. Current Assets: This section lists all assets that can be converted into cash within one year.
  2. Fixed Assets: This section lists all of the assets used by the company for more than one year.
  3. Liabilities and Equity: This section lists all of the money that the company owes to creditors and shareholders.

A budgeted balance sheet is an essential tool companies use to manage their finances. It provides a snapshot of the company’s financial health and can be used to make important decisions about spending and investments.

How Does Master Budgeting Work?

A master budget is a tool that businesses use to plan for their future. The budget includes all of the company’s revenue and expenses, both fixed and variable. The goal of the master budget is to ensure that the company has enough money to cover all of its expenses and still make a profit.

  1. The first step in creating a master budget is to gather data on all of the company’s revenue and expenses. This data can be collected from financial statements, tax returns, and other records. Once all of the data has been gathered, it is time to create the budget.
  2. The budget should start with a list of all of the company’s revenue streams. This list should include both fixed and variable costs. Next, all of the expenses should be listed. These expenses can be divided into two categories: fixed and variable. Fixed expenses do not change from month to month, such as rent or mortgage payments. Variable expenses are those that do change, such as utilities or groceries.
  3. After all the revenue and expenses have been listed, it is time to start creating the budget. The budget should be completed to ensure that the company has enough money to cover all of its expenses and still make a profit. The budget should also be created to allow the company to save money for future investments.

Creating a master budget can be a difficult task, but it is essential to running a successful business. A master budget can help a company plan for its future, save money, and make sure that it is making a profit. With a little bit of effort, any business can create a master budget that will help it to succeed.

How to Prepare a Master Budget?

The master budget is prepared in several steps.

  1. First, the sales forecast is created.
  2. Second, the production budget is made based on the sales forecast.
  3. Third, the direct materials, direct labor, and manufacturing overhead budgets are created.
  4. Fourth, the selling and administrative expense budget is created.
  5. Fifth, the budgeted income statement and balance sheet are prepared.
  6. Finally, the cash budget is prepared.

If you are doing master budgeting for the first time, it is better to use a template. A master budget template will help you finish all the steps required to prepare a master budget.

Master Budget Example

The best way to learn something is by seeing an example. So, here are a few master budget examples for you. Please check the following links

Example 1

Example 2

You can also use the templates provided in Microsoft Excel for FREE.

Master Budgeting Tips

Now that you know what is a master budget and how to prepare one, here are a few tips that will help you do it better.

  • Make sure you involve all the departments in the budgeting process. The master budget will only be as good as the inputs received from each department.
  • Do not make assumptions while preparing the budget. All the estimates should be based on historical data or market research.
  • Use software to prepare the master budget. This will help you to make changes quickly and also track your progress.
  • The budget should be reviewed and updated regularly. The budget should be flexible enough to accommodate the changes.

Benefits of Master Budgeting

A master budget is an excellent tool for financial planning. It provides many benefits.

  • Forecasting: A master budget is an excellent tool for forecasting. It helps you to predict future sales, expenses, and profits.
  • Control: It can be used as a tool for management. Master budgeting allows you to track the actual results and compare them with the budgeted results.
  • Planning: You cannot manage without proper planning. The master budget helps you to plan for the future. It is an excellent tool for long-term planning.
  • Communication: It allows you to communicate the company’s financial goals to all the employees. When everyone knows the objectives, they can focus their efforts on that.
  • Better decision-making: The master budget provides you with the information you need to make informed decisions.

FAQ

Which budget is the starting point in preparing financial budgets?

The sales budget is the starting point in preparing master budgets.

What are the three types of transactions that generate cash?

The three types of cash transactions are operating activities, investing activities, and financing activities.

What is a static budget?

A static budget is a budget that does not change with the level of activity. Instead, it is prepared for a single group of activities.

What is a flexible budget?

A flexible budget is a budget that changes with the level of activity. Therefore, it is prepared for multiple levels of activity.

What is a cash budget?

A cash budget is a budget that shows the expected cash inflows and outflows for a period of time.

What is the primary difference between a master budget and a flexible budget?

A master budget is a detailed financial plan that includes all the budgets for a company. It is prepared for a single level of activity.
A flexible budget is a budget that changes with the level of activity. Therefore, it is prepared for multiple levels of activity.

What are the three types of budgets?

The three types of budgets are operating budget, cash budget, and capital budget.

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Conclusion

A master budget is a helpful tool for organizations to use when planning their spending and tracking their progress toward financial goals. The budget includes both operational and capital expenses and income and cash flow. While the budget may be complex, it can be broken down into smaller components to make it more manageable.

Once you have prepared the master budget, you need to monitor it constantly. You should review the budget periodically and see if there are any discrepancies.

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Kalpataru Biswas

Kalpataru Biswas is a writer with a focus on business and career-related subjects. He has been writing for various websites since 2018 and has more than ten years of experience in driving revenue through data-driven Sales & Marketing.

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