Master Business Budgeting - Shelton Business Services

The master budget is a business management tool used to project operating and financial performance. The budgeting processing can be overwhelming. But with a little coaching, preparation and effort the capable executive can create a budget that will keep your business on track during the year. Here is how to prepare a master budget and use the data to make strategic business adjustments.

Overview of budgeting

The first known use of the word budget is from the 15^th century. Countries, businesses and households have been doing budgets for a long time. Still the budgeting process remains a mystery of complexity to many people and becomes nothing more than a platform for their desk paperweight. Budgets are a business tool that can power operating results and improve financial durability.

How are budgets used and developed?

Budgets are prepared with a collaborative effort from cross-functional business teams. Gather financial and operating data from the prior year to aid your budgeting process. Budgets are forward looking and prepared for internal use only. Enlist the help of staffers from accounting, marketing, finance, operations, engineering, information technology and other business functions. The budget process can take weeks but the well constructed budget is used by the entire company to stay on track and make strategic business adjustments throughout the year. Begin the budget process well before the beginning of the fiscal year.

The master budget is made of:

• Operating budget: An estimate of unit sales, production and materials requirements for the upcoming period.
• Financial budget: The budgeted income statement is prepared using the production budgets and the operating expenses budget.

The operating budget is made of these sub-budgets:

• Sales budget: An estimate of sales for the upcoming period prepared by the marketing and sales departments
• Production budget: An estimate of unit production to meet the sales budget. Production managers usually build in a reserve for finished product to meet unexpected demand.
• Direct materials budget. An estimate of materials required to meet the production budget. Purchasing managers usually build in a reserve for raw materials to meet unexpected production requirements.
• Manufacturing Overhead (MOH) budget: The estimated indirect variable and fixed manufacturing costs.
• Operating expenses budget: An estimate of the variable and fixed non-manufacturing costs.

We will go into greater detail about these budgets in the next posts. Until then give some thought to the training, education, executive coaching and systems you need to prepare a master budget.

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