How can you use a master budget to coordinate your operating budget with other financial plans?

1 Benefits of a master budget

A master budget has several benefits for your business. First, it helps you create a realistic and consistent operating budget that reflects your sales forecasts, production plans, and cost estimates. Second, it helps you monitor and control your financial performance by comparing your actual results with your budgeted targets and identifying any variances. Third, it helps you communicate and coordinate your financial plans with your stakeholders, such as managers, employees, investors, and creditors. Fourth, it helps you evaluate and improve your business processes and efficiency by using benchmarks and standards.

2 Components of a master budget

A master budget consists of two main components: the operating budget and the financial budget. The operating budget shows your expected revenues and expenses from your core business activities, such as sales, production, and marketing. The financial budget shows your expected cash inflows and outflows from your financing and investing activities, such as borrowing, repaying, and purchasing assets. The operating budget and the financial budget are interrelated and affect each other. For example, your sales revenue affects your cash receipts, and your production costs affect your cash payments.

3 Steps to create a master budget

Creating a master budget requires several steps. Start with the sales budget, which outlines the projected sales volume and price for each product or service. This forms the basis for other budgets, as it determines revenue and demand. Then, create the production budget to show how many units need to be produced to meet sales and inventory goals. The direct materials budget follows, which indicates how much raw materials need to be purchased and at what cost. After that, create the direct labor budget to show how many hours need to be paid for production at what rate. The manufacturing overhead budget should also be made, which shows the indirect costs of production such as utilities, rent, and depreciation. The cost of goods sold budget is important as it shows what it costs to sell the units produced. Additionally, the selling and administrative expense budget is necessary to show the non-production expenses such as advertising, salaries, and insurance. To get a complete picture of your operations, create an income statement budget and a cash budget. Finally, create a balance sheet budget to show assets, liabilities, and equity at the end of the period.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?