Master Budget

What is master budget

Master Budget is the combination of different set of separate independent functional budgets reflecting a complete set of financial plan for a business firm. When all of the functional budgets are prepared then at the end maser budget is prepared. The type of functional budget that are prepared depends upon the nature of the business entity. The master budget is a complete set of books of accounts for future because it accumulates all the financial information in one place. Master budget records and reports the business transaction of the forthcoming periods whereas the financial accounting records and reports the business transaction of already incurred transaction.

Components of Master Budget

• Sales Budget
• Production Budget
• Purchase Budget
• Expenses Budget
• Equipment Purchase Budget
• Cash Budget
• Budgeted Profit and Loss Statement
• Balance Sheet

Sales Forecast is the proper starting point for the master budget. Because of its fundamental nature in the budgeting process, demand must be predicted as accurately and with as many details as possible. Sales Forecast must indicate type and quantity of products to be sold , geographic locations of the sales , and points in time the sales are to be made. Estimated Sales demand has an overall impact on the master budget.

After the master budget with all of its projected financial statements has been developed, it can be used for a variety of purposes. One of the common use of master budget is to help in obtaining bank loans. Master budget can be used to monitor performance by comparing budgeted figures to actual results.

Production Budget

Format of Production Budget

Production Budget
Particulars	Amount
Planned Sales Units Add: Desired Final Inventory Levels of Finished goods	XXX XXX
Total Requirements for production Less: Beginning Inventory of Finished Goods	XXX XXX
Planned Production Units	XXX

Cash Budget 

Objectives of Preparing Cash Budget

• To provide managers with advance notice of the resources at their disposal and the results they are expected to achieve.
• To provide targets useful in evaluating departmental performance.
• To provide warnings of potential cash shortages by time period.
• To establish the need for financing and the availability of idle cash for investment.
• To establish a sound basis for continuous monitoring of the cash position.
• To force managers to plan and coordinate cash with (a) total working capital, (b) sales revenue, (c) expenses,(d) investments , and (e) liabilities.

Major Sections of Cash Budget

• Cash Receipts Section
• Cash Disbursement Section
• Excess /Deficiency Cash Section
• Financing Section

Methods of Preparing Cash Budget

• Receipts and Disbursement Approach
• Income Statement Approach

Format of Cash Budget

Cash Budget For the Year Ending 20XX
Particulars	January	February	March	Total
Beginning Cash Balance
Planned Cash Receipts:
1) Cash Sales
2) Collection of A/R
3) Notes Receivables
4) Borrowings and Issue of Bonds
5) Receipts from dividends, interests, royalties
6) Commissions
7) Issue of Share Capital
8) Disposal of Assets
9) Other Cash Inflows
Total Cash Available (A)
Planned Cash Disbursements:
1) Cash Purchase
2) Payment of Accounts Payable
3) Payments for wages, salaries and commission
4) Royalties, etc.
5) Payment for rent, rates and taxes
6) Payment for Dividends and Interest
7) Purchase of New Assets
8) Loan Redemption
9) Other Cash Expenses and Payments
Total Planned Cash Disbursement (B)
Cash Balance Before Financing (A-B)
Desired Minimum Cash Balance
Financing:
Borrowing(Short Term Loan)
Repayment: Principal
Interest
Total Cash Under Financing
Ending Balance of Cash After Financing

Things to Consider before preparing Master Budget

Master Budget needs realistic information which means that it is not formulated in vacuum. Result of master budget prepared without the realistic information is similar as the outcome of the coin tossing game where the chances for head or tail are equal. All the financial information are accumulated at one place with the help of master budget.

Financial Accounting records and reports the business transaction of already incurred transaction whereas , the master budgeting records and reports the business transactions of the forthcoming periods. There are some of the information that must be known clearly before formulating the complete set of master budget which include,

• Goal of the Firm
• Policies and Guidelines
• Inventory Policy
• Policies for cash deficit and excess fund
• Standard and allowances
• Product Costing and inventory valuation system

Master Budget in Non-Manufacturing Business

Master budget in case of a merchandise business (retailer, whole-seller or departmental store) is almost the same as the process discussed above for a manufacturing business except that it does not need; (1) production (2) raw material (3) direct labor and (4) manufacturing overheads. A merchandise business is one, which buys the ready-for-sale goods and sells at the same state.

In case of a merchandising firm, instead of preparing the production budget it would prepare a merchandise purchase budget showing the amount of goods to be purchase from its suppliers during the period. The merchandise purchase budget is in the same basic format as the production budget, except that it shows goods to be purchased rather than goods to be produced. Budgets most often completed in case of merchandise firms are; Sales and Collection of A/R budget, Merchandise purchase budget, Operating expenses budget, Cash budget, Budgeted income statement, and the budget balance sheet.

The following schedules are most often completed in case of a merchandise firm;

a) Sales and collection of A/R budget.
b) Merchandise purchase budget
c) Operating expenses budget
d) Cash budget
e) Budgeted income statement
f) Budget balance sheet

Play Quiz : Test Your Knowledge

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