Master Budgets: Planning for the Future Marcus Nicholson ACC 561 March 1, 2010 Carla Ross Organization and planning are important elements of starting and maintaining any successful business. Learning from experiences in business transactions and seeking to acquire knowledge from current as well as future endeavors aid a business in succeeding. Learning and understanding a budget is a good quality to master because it can give insight to managers regarding the health of the company. Few people every dreamed of growing up to excel in the art of budgeting.
Regardless of the reason people become managers, making a master budget is a part of the planning process for a business. Pieces of a Puzzle A master budget is comprised of several parts combined to form the master budget. The main parts of the master budget consist of the operational and financial budget. It is within these two parts that most if not all of the information needed to form a master budget of a company exist. Master budgets seek to outline a plan for the future in the upcoming year or quarter for the company’s finances. The master budget is a detailed and comprehensive analysis of the first year of the long range plan”, (Horngren, et. al. , 2008, p. 304). The year review of the master budget takes the components of the operational and financial budgets and break down the important information contained within each. Fitting the Pieces Together Elements of the operational and financial budget interact and affect each other; changes in one will cause changes to occur for within the other. The operational budget consists of the sales, operating expense, along with the purchases and cost-to-goods-sold budgets to form a budgeted income statement.
The operational budget assist the manager in planning with purchases and expenses of materials along with labor cost required to maintain the company. The financial budget’s primary elements consist of the cash budget along with the capital budget. The two budgets when information in each is combined form the budgeted balance sheet, which is the primary result in the financial budget. This budget provides useful information managers as well as investors how well the company is doing financially and can it invest in future projects to assist in the growth of the company.
Finishing the Puzzle Companies rely on accurate information to plan and conduct operations that will create profits and not losses. Creating a master budget will allow the person making the decisions within the company to use the data to make wise decisions. It is for this reason that master budgets are useful in most companies with multiple departments and budget needs. In a small company that does not have a large managerial staff, creating a master budget would consume a lot of time and is considered non-productive.
This time spent on the master budget results in time taken away from business activities. Advantages of creating a master budget provide an idea of where a company wants to go and what it is doing in order to get there. Master budgeting allows the company to realistically project future cash flows that help in getting certain types of financing. Depending on what the company views as important will determine how much focus is placed on constructing a master budget. References: Horngren, et. al. (2008). Introduction to management accounting (14th ed. ). New Jersey: Prentice Hall.