A master budget is an overall financial and operating plan for a forthcoming calendar or fiscal year. It is usually prepared annually or quarterly. The master budget is really a number of sub budgets tied together to summarize the planned activities of the business. The format of the master budget depends on the size and nature of the business.

Operating and Financial Budgets

The operating budget deals with the costs for merchandise or services produced. The financial budget examines the expected assets, liabilities, and stockholders' equity of the business. It is needed to see the company's financial health.

The cash budget is for cash planning and control. It presents expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs and aids in avoiding idle cash and possible cash shortages. The cash budget typically consists of four major sections:

1. Receipts section, which is the beginning cash balance, cash collections from customers, and other receipts

2. Disbursement section, comprised of all cash payments made by purpose

3. Cash surplus or deficit section, showing the difference between cash receipts and cash payments

4. Financing section, providing a detailed account of the borrowings and repayments expected during the period

The static (fixed) budget is budgeted figures at the expected capacity level. Allowances are set forth for specific purposes with monetary limitations. It is used when a company is relatively stable. Stability usually refers to sales. The problem with a static budget is that it lacks the flexibility to adjust to unpredictable changes.

In industry, fixed budgets are appropriate for those departments whose workload does not have a direct current relationship to sales, production, or some other volume determinant related to the department's operations. The work of the departments is determined by management decision rather than by sales volume. Most administrative, general marketing, and even manufacturing management departments are in this category. Fixed appropriations for specific projects or programs not necessarily completed in the fiscal period also become fixed budgets to the extent that they will be expended during the year.

Examples are appropriations for capital expenditures, major repair projects, and specific advertising or promotional programs.

Businesses use budgets to plan for future activities and to set various goals and objectives within the company. They help the organization set specific expectations which aid in evaluating performance throughout the company. Budgeting helps organizations implement specific strategies to meet goals and objectives. It is important to note that a budget is an estimate and will often need to be adjusted over time.

In order to properly plan and set goals, several different budgets must be created. This article discusses some of the more common budgets used by businesses.

Sales Budget - The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production Budget - Product oriented companies create a production budget. It is an estimate of the number of units that must be manufactured in order to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, such as labor, material, and other expenses.

Cash Flow Budget - The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing Budget - The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project Budget - The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Master Budget - The master budget is a summary of the plans created for the subunits of the company. It is used to create projected financial statements. The master budget results in the creation of a pro forma income statement and a pro forma balance sheet. These are also referred to as a budgeted income statement and a budgeted balance sheet. Potential investors and lenders want to see the projected financial statements in order to make decisions that will ultimately affect the company