A master budget is an expensive business strategy that documents expected future sales, productions levels, purchases, future expenses incurred, capital investments, and even loads to be acquired and repaid. In other words, the master budget includes all other financial budgets as wells as a budgeted income statement and balance sheet.
The master budget is basically management's strategic plan for the future of the company. Every aspect of the company operations is charted and documented for future predictions. You can almost think of the master budget as a folder that includes all of the other budgets including:
- Sales budget
- Merchandise purchases budget
- Production budget
- Manufacturing budget
- Selling budget
- General and Administrative expense budget
- Capital budgets
- Cash budgets
- Budgeted Financial Statements
The master budget is used by the company management and the officers to make strategic "big picture" decisions about long-term strategy as well as current year forecasting.
A good example of long term planning is a merger or acquisition of another company. Management must look at what the company can gain by purchasing another company and what resources would be redundant. For instance, every company has a group of employees in charge of the administrative duties within the company. If a company was purchased, there would no need to keep two sets of administrative staff. The management of the acquiring company would have to make a decision who should be let go.
Management can also use the master budget for expansion planning. For instance, a machine shop should consider current cash flows, current loan rates, current debt limits, and future expected sales before management plans a large expansion. The master budget includes detailed budgets with all of this information.
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