A master budget is the accretion of all sub-level budgets created by an organization's various functional areas. The master budget includes financial statements like cash forecasts and a financing plan (Birt, 2019). The master budget is also periodic, usually presented either a monthly or a quarterly basis, depending on an organization's requirements. The budget is usually accompanied by a narrative section which explains the company's mission, vision, objectives and the need for the different funding that is stipulated in the budget (Birt, 2019). The narrative also details the different managerial actions needed, in addition to budget approval that will be needed to see the set objectives come to fruition. Irrespective of the period an organization uses to prepare its master budgets and the budget covers a company's fiscal year. Depending on the objectives at hand, there may be a headcount section that indicates any additional personnel that will be needed to achieve the objectives of the budget (Birt, 2019).
Importance of Preparing Master Budget
Shah (2007) argues that a master budget is the key planning tool that the management team of any/all organizations use to steer the activities it is involved. The master budget can additionally be used as a performance monitoring tool that is used to gauge the efficacy and yield of different activities. It is prudent to note that a master budget is not a fixed/static document. It is continuously reviewed based on the prevailing conditions of the market and other internal factors of the organization (Shah, 2007). The most competent method of coming up with a master budget as Shah (2007) argues is participative budgeting, where all departments and relevant persons submit the portion of the budget that affects their objectives.
Organizations use budgetary planning to encourage arranging and control inside a business firm so they can deal with the money related parts of their business and plan for new item development later on. Planning takes into consideration the assessment of the presentation of organizations during the arranging time frame. Before the money related planning arranging procedure can start, the firm ought to build up a key arrangement and a progression of goals dependent on that vital arrangement covering the following five years. The vital arrangement frames the reason for the different spending plans that the firm will assemble. In other organizations, management decides the amounts that are directed towards the different sections.
Sections of a Master Budget
Depending on the organization, the elements that can be bundled to form a master budget will thus vary (Reichard et al., 2019). Master budget, for the most part, has two sections; the working budget plan and the money related spending plan. The working spending demonstrates the salary of producing engagements for the firm such as incomes and costs. The outcome is a planned salary explanation. The money related spending demonstrates the inflows and surges of money and different components of the company's monetary position. The inflows and surges of money originate from the money spending plan. This way, the aftereffect of the monetary spending plan is the planned accounting report. Working spending plans are arranged first as data from the working spending plans are required for the budgetary spending plans. However, the following are the standard sheets that form a master budget. They include:
- Direct labor sheet/budget
- Direct materials sheet/budget
- Ending finished goods sheet/budget
- Manufacturing overhead costs sheet/budget
- Production cost sheet/budget
- Sales sheet/budget
- Selling and administrative costs sheet/budget
The named sheets may then be broken down to different sections, depending on the nature of the company. For instance, an organization may divide its selling and administrative budget into budgets for different departments, such as the engineering, accounting, facilities, and marketing departments (Reichard et al., 2019). It is common practice in today's organization's to use ERP's and other software that add to an easy sharing of information. Thus it has become industry practice to feed the final figures of the master budget into the ERP or whatever information system that the organization is using for purposes of comparing budgeted and actual results/costs (Reichard et al., 2019).
SME's usually factor/create their budget using electronic spreadsheets/software solutions. A key pitfall of this approach is that creators of the sheets/financial statements will need to have in-depth knowledge of formulas and other tools within the software. Not knowing these will give the accountant a hard time balancing sheets and creating the budget in general (Reichard et al., 2019). Larger organizations tend to use customized financial software that is tailor-made to their specifications thus, have no such problems of mastering formulas.
Advantages of Creating a Master Budget
The obvious advantage that a master budget presents is that it gives a bird's eye view to management over how the organization will operate within a fiscal year. It presents information from the different sectors/departments of the organization in a simplified form, thus making decision making easier for top management (Dudin et al., 2015). The second advantage of creating a master budget is that it assists in allocating responsibility to different personnel. Hence the executive management of an organization knows who is in charge of a particular responsibility at any given time (Dudin et al., 2015). Besides, a budget aids in the coordination of both personnel and resources by communicating to every personnel what is expected of them and the resources that will be put at their disposal to achieve the set objective. Since the budget is communicated to all departments and affiliated parties, it creates a uniform image in all the players of an organization; hence everyone knows what their contribution adds up to in the whole picture or mission (Vom et al., 2016). Another advantage of budgeting is that it is a stem of the control function of an organization. Hence it is possible to measure, evaluate and adjust the actions of an organization through the use of a budget.
The most significant position of having a spending plan is the capacity to distinguish issues and plan. For instance, the master budget plan can appear on the chance that one office is spending past its farthest point, making the organization spend more than it is acquiring every month. To fix the issue, you can recognize which division is spending too much by taking a gander at the individual office spending plans. At that point, you'd either cut that office's costs or make slices in different offices to free up assets to cover that extra spending. The other primary explanations behind an ace spending plan are to give the entrepreneur or organization administrators a review of the organization's financial limit. Since littler spending plans for every division just spread the costs and income for every individual region of the business. The ace spending plan uncovers how much your organization is acquiring and spending all in all, and shows whether the business is in great or negative budgetary standing.
Having a budget forces an organization to lean towards the quantification of its goals and objectives. Hence to a large extent, all the stakeholders know the extent to which they are expected to perform/to which percentage. This makes it easy for employees and managers to track performance of their activities, giving them more control and basis to enforce different actions that will lead to the achievement of the overall objective (Vom et al., 2016). Furthermore, budgeting promotes the division and specialization of labor in an organization. Hence the synergy within an organization is not only fostered but also seen as a necessary means to the company achieving its goals.
Advantages of Participative Budgeting
Participative budgeting is the approach of budgeting that allows lower levels of management to participate in the budgeting process by ensuring that their recommendations are factored into the final budget (Shah, 2007). It is prudent to note that this approach to budgeting is favorable for small to medium scale of organizations as there will be less time wasted in consultation meetings (Shah, 2007). This being the case, participative budgeting has the following benefits: It increases communication within the organization by fostering better bottom-up communication. It also makes the communication between departments with related functions better as they will need to combine some parts of their budgeting. In addition to promoting communication, participative budgeting also promotes commitment within an organization. The budget will stipulate resources, objectives, and the person responsible; thus it will greatly tie managers and other employees to the set objectives. This will, in turn, increase task completion rates.
The third advantage of participative budgeting is the improved problem identification that it avails. Since the budget will come from different departments, if there is an issue, then it can be traced down to the department/personnel involved easily (Shah, 2007). This makes the process of resolving problems much easier for management. The fourth advantage of a participative budget, as Shah (2007) adds is that it increases the confidence improvement of lower management. Due to the part, they play in the budget, and low-level managers will be motivated to work harder as they will feel their input is not only needed but is valued. This approach to budgeting will also have positive psychological effects on the junior management. In addition to motivation, participative budgeting also fosters potential identification. As participative budgeting requires input from the different levels of management, it makes it easier to spot talent from low to executive levels of management. This plays a key role in furthering the careers of employees and the promotions that come thereof also add to the motivation factor of employees that have not been identified (Shah, 2007).
A key advantage of the participative budget is the accuracy it adds to the budgeting process. In comparison to an administratively done budgets, participative budgets accurately depict the needs of a department/section. Hence it follows that a master budget that is arrived at through a participative approach will be a more accurate picture of an organization's needs (Shah, 2007). Managers at lower levels in the organization can predict budgetary needs more accurately as they have closer interaction to operations of the organization and their resulting details. They will thus take all these into consideration and prepare an accurate budget.
Overview of the Budgeting Process
Before stepping into the overview of a budget, it is important to note that different organizations employ different steps to arrive at a budget. However, there are two broad overviews of budgeting techniques. These are a Top-Down approach and a Bottom-Up approach. Under a top-down approach, top-level executives make the budget (Shah, 2007). They decide the financial goals and objectives and resultantly what objective/department or activity receives what amount of funding. Also, the top-level executives create the guidelines to sales budgets, compensations and any other expense that the organization is to incur. Lower level management is awarded the least amount of participation in this form of budgeting process (Shah, 2007). They are only involved in implementing these guidelines. The diagram below illustrates a Top-Down approach of budgeting.
The second approach to budgeting is a Bottom-Up approach or participative budgeting, as previously discussed. This...
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