The master budget for your small business encompasses a comprehensive single financial plan that combines smaller budgets for your fiscal year. Your master budget consists of operating budgets, which detail revenues and expenses, and financial budgets, which show how you expect cash to flow into and out of the company. The end result of this process is a budgeted balance sheet, the financial statement that breaks down how much income and assets your company should have compare to its debts and expenses in the coming fiscal year.
Developing a master budget helps your company plan business activities for the year and forecast the growth you see ahead. A master budget also provides a frame of reference to compare actual performance to what you expected to happen.
Timing of the Master Budget Process
Completing a master budget requires you make smaller budgets from several key aspects or departments of your business. The operating budget projects income and expenses based on projected sales revenue. The sales budget projects revenues from selling goods or services. A production budget calculates how many items you expect to produce and at what cost. Your labour budget estimates your company’s costs of paying employees throughout the year. A materials budget takes into account purchasing materials to create your products. An administrative budget projects the costs incurred by activities that don’t directly deal with the selling or production of your goods or services, such as accounting and hiring of new staff. Develop a cash budget for cash you have on hand for purchasing small items or for emergencies. Each departmental budget should have specific breakdowns of how they plan to operate in the coming year.
A financial budget outlines how much money you have at the beginning the of the year versus the end. It gives you an idea of how much you can spend on a particular department and when, because you don’t have the entire budget for a year once the new fiscal year starts. Elements of a financial budget include your cash on hand, loan payments you make, monthly expenses and monthly income.
You must finish both sets of budgets before beginning work on the master budget. The smaller components of your master budget should clearly outline information found on income statements, statements of cash flows and your overall balance sheet. The master budget coincides with your company’s fiscal year, but you can break it into smaller time periods, such as weeks, months and quarters (three-month periods), so you can see the progress your company makes.
Uses for Your Master Budget
Use your master budget to plan for business expansion, cash flow management, product development and future opportunities. Your master budget can minimize the risk of investing in your company’s growth, as it gives you an accurate idea of the revenues and expenses you face in the future. Budgeting for future cash flow helps you plan for the future while ensuring the business remains able to pay its bills and turning a profit.
Comparing certain budget components, such as the production budget, with the master budget itself provides insight into the appropriate investment amount for new product development. Doing so with a comprehensive budgeting strategy can outline the best opportunities for future expansion.
Examples of a Master Budget
Take a look at an example of an annual master budget for a company called Acme Brick. It uses components of the company to outline how it plans to make money in a coming year.
- Administrative Budget: $10,000
- Cash Budget: $5,000
- Labor: $50,000
- Materials: $40,000
- Sales: $15,000
Operating Budget Subtotal: $120,000
- Cash on hand: $10,000
- Projected income: $195,000
- Loan payments: $25,000
- Total expenses: $120,000
Total Profits: $60,000
This example shows, in a general way, how your operating budget and financial budget coincide. Your annual budget gives you a snapshot of where you start and where you end up after a year. The more details you put in your master budget, the more accurate your projections become.
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