Master Budget

The master budget links the short-term and long-term plans by providing a detailed analysis of the first year of a long-range plan. It provides a summary of the planned activities of all the organizational subunits, i.e. sales, production, distribution and finance. It also quantifies the managerial objectives to provide short term targets for the organization. Hence, this budget provides a comprehensive plan for the future and also how these plans will be carried out.
In order to create a master budget a number of inputs are required. These include the sales budget and cash flow estimates for production and other activities. These are important because all other estimates depend on the level of sales anticipated. They help in preparing the two major components of the master budget – the operating budget and the financial budget. The former focuses on the income statement and its supporting schedules or, in an organization with no sales revenues, on budgeted expenses and supporting schedules. In contrast, 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 balances.
A company will need to create a master budget in order to translate long-term strategies into short-term objectives. This helps the organization to not lose sight of its long-term goals while managing its day-to-day activities. Hence, the major advantage of master budget is that it provides the direction to attain long-term goals. Additionally, it helps in realistically projecting future cash flows and planning for major investments. It quantifies organizational objectives and hence helps in not only communicating them across the organization but also evaluating subsequent performance. It also provides financial details that are beyond the financial statements.
But there are also some disadvantages of a master budget. The process depends heavily on the accuracy of the sales budget and hence the sales...