Major Components of a Master Budget
A master budget contains all of the other budgets within a business. A successful budget depends on accurate predictions of future activity within each department or division. While companies with multiple divisions have a more complex master budget, all businesses share the same major components. The two main parts are the operational budget and the financial budget. There is a specific order of completion when preparing a master budget.
The operational budget comprises sales, production, direct material costs, direct labor costs, overhead, administrative and cost of goods manufactured. Some industries use these categories differently. For example, while a manufacturer has a production budget for making goods, a department store has a merchandising budget to buy from its suppliers. Each of these categories has its own budget, with sales being the most important component.
Sales revenues fund the other operational budgets. The sales budget and all other department budgets are closely related. The cost of producing an item, including direct costs and indirect costs, is a major consideration when setting the selling price of a line of merchandise. Yet the selling price must be competitive in the marketplace to make enough sales to fund the other budgets. Streamlining the process and minimizing waste is essential to increasing profits.
The financial budget has five parts. The schedule of expected cash receipts is based on predicted future sales revenues during each period. The amount for each month or quarter will vary in small businesses that are cyclical in nature. The schedule of expected cash payments reflects the amount of money your business plans to spend on purchases during each financial period. The cash budget, income statement and balance sheet all reflect budgeted amounts. If you compare them with the actual numbers at the completion of each quarter, then you can make any necessary adjustments.
Some component budgets require financial data from other budgets before you can complete them. The correct order for completing the operational budget components is: sales, production, direct material purchases, direct labor, overhead, administrative and cost of goods manufactured. When completing the financial budget, begin with the schedule of expected cash receipts and then continue with the schedule of expected cash payments to suppliers, the cash budget, the budgeted income statement and budgeted balance sheet. Following this order will ensure that you have the necessary information for the next component.