The master budget bonds the long-term and short-term goals of a business by giving a thorough analysis of the first year of a long-range plan. It gives an outline of the activities planned by all of the subunits of an organization; for example, production, sales, distribution, and finance. The master budget also measures the managerial objectives to provide short-term targets for the organization. Therefore, this budget provides a concrete plan for the future and illustrates how these plans will be used.
To create a master budget a collection of data is needed. This entails the cash flow estimates and the sales budget for production and other proceedings. This data is vital due to the fact all the other estimates depend on the level of sales expected. They also aid in organizing the two major elements of the master budget – the operating budget and the financial budget. The operating budget focuses on the income statement and its supporting schedules or, in another case- when an organization has no sales revenues- on budgeted expenses and supporting schedules. On the other hand, the financial budget’s focal point is on the effects the operating budget and other plans (i.e., capital budgets and repayments of debt) will have on cash balances.
In order to transform long-term strategies into short-term objectives, a company will need to create a master budget. This helps the organization maintain sight of its long-term goals while managing its daily activities. The major advantage of master budget is that it paves the way to achieve long-term goals. In addition, it assists in predicting future cash flows and planning for major investments. It calculates organizational objectives and helps in not only making sure the objectives are conveyed throughout the organization but also evaluating succeeding performance. It also provides financial features that go outside the financial statements.
Though beneficial to an organization, there are still some disadvantages of...