Master Budget

A master budget is an extensive analysis of the first year of the long-range plan. It summarizes the planned activities of all subunits of an organization. Master budget includes forecast of sales, expenses, balance sheets and cash receipts and disbursements (Horngren, Sundem, Stratton, Burgstahler, & Schatzberg, 2008, p. 304). The writer will the major inputs to the master budget and the usefulness of each, indicate why a company would potentially create a master budget, as well as list advantages and disadvantages.

It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. The two major part of a master budget are operating budget and financial budget. The operating budget focuses on the income statement and its supporting schedules. The financial budget focuses on the effects that the operating budget and other plans such as capital budgets and repayments of debt will have on cash. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished.

Some components of a master budget include cash budget, budgeted income statement and budgeted balance sheet. A cash budget can be deemed useful budget because it allows the manager to know if projected funds will properly finance the operations of the company and how new company ventures may be financed. A budgeted income statement, a statement that projects how the company will do for its shareholders as it progresses through the term covered by the budgeted income statement. Lastly, a budgeted balance sheet allows the manager to determine how the projected operations will affect debt to equity and owner's value for the company.

A company would need to create a master budget because it will allow for multiple projections for new ventures or identify poor current operations that are draining funds. Most companies that would find this necessary are very large.

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