Course Hero Logo

Master Budget

Important Factors in the Master Budget Process

Creation of the master budget involves the consideration of operating budgets to create pro forma financial statements.

The master budget is a central part of any company's managerial accounting planning process. A master budget is a combination of many other smaller budgets within the organization. When combined, these smaller budgets will lead to budgeted financial statements for the company.

The management team creates a master budget to direct the activities of a corporation. Individual managers use the master budget to help them judge the performance of various parts of the organization.

The master budget is a comprehensive and complex planning tool that includes many operating processes and has inputs from several sources within an organization. These sources include sales and marketing, finance, general accounting, purchasing, and inventory control. In the end, the master budget will determine the basis of inputs into the organization's pro forma financial statements which are documents that include assumptions and projections about what an organization will spend and create during a specific time period. Pro forma is a Latin term that means "standard" or "as a matter of form." In accounting terms, it means "projected." The income statement, balance sheet, and statement of cash flows are among the most important parts of a master budget. A balance sheet is a snapshot of what a company owns and what its debts are. An income statement is one of the four major financial statements; it measures revenues minus expenses to arrive at the net income or net loss during a specific time period. A statement of cash flows is one of the four major financial statements, classifying cash receipts and payments by operating, investing, and financing activities for a specific period.

The master budget is typically presented in either a monthly or quarterly format, and it usually covers a company's entire fiscal year. Organizations often use it to develop a cash flow forecast, determine potential financing needs, and predict staffing requirements.