How to prepare a master budget

If you are in business you probably know all too well that preparing a master budget can be a daunting yet extremely important task.The master budget is a comprehensive planning document that incorporates several other individual budgets.

A master budget is usually classified into two individual budgets:the Operational budget and the Financial budget.The master budget is usually considered as the cornerstone of the entire budget.Each separate part consists of preparation for other budgets which we will discuss in this article.

The operation budget consists of eight individual budgets:

• Sales budget:The sales budget shows the expected sales in units at their expected selling prices.A business firm will prepare the sales budget for a given period of time based on the forecasted sales level, production capacity, and long and short term goals.The sales budget must be done first in the process of preparing the master budget because it must identify the expected sales level before it plans for any other activities.
• Production Budget:A production budget is a plan for obtaining the needed resourced to carry out the manufacturing operations to meet the expected number of sales and maintain the desired inventory ending.The number of units produced is directly dependent on the sales level, units of finished goods ending and beginning inventory.
• Direct Material Budget:The directed material budget will show the direct materials your business needs for production and the budgeted cost.
• Direct Labor Budget:The production budget is needed to prepare a direct labor budget as well as the direct materials budget.It enables the personnel department to plan for new hires and repositioning employees.A good labor budget will help businesses avoid emergency hiring and will also help prevent labor shortages.
• Factory Overhead Budget:Your factory overhead budget will include all the production costs except for the direct materials and direct labor budgets.Manufacturing costs will include costs that vary in direct proportion with the manufactured units as well as how the business carries out its operations.
• Ending Inventory Budget
• Selling and administrative expenses budget:The selling and administrative expenses budget is a plan for all non-manufacturing expenses.This particular budget gives you a guideline for selling and administrative activities during your budget period.
• Budgeted income Statement:The last part of operational part of your master budget is the budgeted income statement.It estimates the expected operating income from budgeted operations.It also gives management a vision of the likely operating result upon completing the budgeted operation.Once this part is complete it will become the benchmark against which the budget is evaluated.

The second part of your master budget will include your financial budget.The financial budget consists of two individual budgets:

Cash Budget:Your cash budget will show the effects of all the budgeted activities on cash.By preparing a cash budget your business management will be able to ensure that they have sufficient cash on hand to carry out activities.It will also allow them enough time to plan for any additional financing they might need during the budget period, and plan for investments of excess cash.A cash budget should include all items that affect the business cash flow and should also include three major sections; cash available, cash disbursements, and financing.

Budgeted Balance Sheet:The last step in preparing a master budget is the budget balance sheet.This is the sheet that will show the expected financial position at the end of the fiscal year or budget period.

Understanding how to prepare a master budget is the most important thing a business can do in order to maximize its profits and get a good handle on their budget period.