Master budget

INTRODUCTION

This work on the master budget is important to project or estimate the expenses and income of a company that can be short or long term, making comparisons of previous years to develop a better investment, thus having less expenses and higher income for the company.

If we make a good budget, consulting the different areas of the company, such as sales, collections, purchases, etc., comparing our financial statements with those of other companies in our market and we take into account economic and financial trends, in addition to current regulations, we can generate a powerful business management tool.

Every budget must be prepared by a specialist in this matter, such as economists, administrators, etc., and then, to be approved, it must be reviewed by the financial manager of the company.

It is a budget that provides an overall plan for an upcoming fiscal year. It is generally set for one year, and must include the profit objective and the coordinated program to achieve it.

It also consists of forecasting about an uncertain future because the more exact the budget or forecast, the better the planning process will be presented, set by the Company's senior management.

The following is the graphical representation of the master budget:

Master Budget. Source: Lorca Fernández, Pedro. Social security accounting. Editorial Paraninfo, 2011. (p. 48)

Benefits

It defines basic objectives of the company It determines the authority and responsibility for each of the divisions It is appropriate for the coordination of the activities of each unit of the company It facilitates the control of activities It allows a self-analysis of each period. Company resources must be managed effectively and efficiently.

Limitations

The Budget is only an estimate, not being able to establish exactly what will happen in the future. The budget should not replace the administration, but on the contrary, it is a dynamic tool that must adapt to changes in the company. Its success depends on effort. that applies to each event or activity. Overemphasizing data from the budget may cause management to try to adjust it or force you to make false facts.

Here is a useful video class through which you can learn more about the definition of the master budget, its areas of application and how it is prepared through a practical case, explained step by step. (Professor Jasbleydi Padilla - Financial and treasury management training program at the SENA financial services center)

The master budget is a model to follow due to the characteristics of its application and of obtaining results, it is direct, it is measurable, it is comparative and to a certain extent it ensures the return on investment.

Operation budget

They are estimates that directly in process have to do with the Neurological part of the Company, from the production itself to the expenses involved in offering the product or service, are components of this area:

Sales budget (estimates produced and in process) Production budget (includes direct and indirect expenses) Budget of material requirements (raw material, supplies, auto parts, etc.) Budget of labor (brute force, qualified and specialized) Budget of expenses Production cost budget (without profit margin) Sales expense budget (training, salespeople, advertising) Administrative expense budget (requirement of all types of labor and work distribution)

Financial budget

It consists of setting the sales investment estimates, miscellaneous income to finalize a cash flow that measures the economic and real state of the company, comprising:

Income budget (the gross total without deducting expenses) Expenditure budget (to determine the liquid or net) Net flow (difference between income and expenditure) Final cash Initial cash Minimum cash

Capital investment budget

It includes the entire table of renewal of machinery and equipment that have been depreciated due to their constant use and the intangible means aimed at protecting the investments made, either due to high costs or for reasons that allow ensuring the production process and expanding the coverage of other markets.

Understands:

Purchase tangible asset Purchase intangible asset.

PREPARATION OF THE MASTER BUDGET

The starting point of a Master Budget is the formulation of long-term goals by management, this process is known as “strategic planning”.

The budget is used as a vehicle to guide the company in the desired direction, once the budget is prepared, it serves as a useful tool in controlling costs.

The first step in the development of the master budget is the sales forecast, the process ends with the elaboration of the budgeted income statement, the cash budget and the budgeted balance sheet.

Approaches:

Top management approach. Sales, production, finance, and management executives should forecast sales based on experience and knowledge of the company and the market. Approach based on the organization. The forecast starts from the bottom with each of the vendors, the advantage is that all levels of the company participate in some way in the development of the budget estimate.

Sales budget

They are estimates that have as a priority to determine the real and projected level of sales of a company, to determine the time limit.

Components:

Products that the company sells Services it will provide The income it will receive The unit prices of each product or service The level of sale of each product The level of sale of each service

Observations:

The basis on which the sales budget and the other parts of the master budget rest, is the sales forecast, if this forecast has been carefully and accurately, the following steps in the budget process would be much more reliable, for example:

The sales forecast provides the expenses to prepare the budgets for:

Production Purchasing Selling expenses Administrative expenses

The sales forecast begins with the preparation of sales estimates, carried out by each of the salespeople, then these estimates are sent to each unit manager.

Preparation of a sales budget

It starts with a basic one that has different lines of products for the same item, which is projected as a sales forecast for each quarter.

Production budget

They are estimates that are closely related to the sales budget and desired inventory levels.

Actually the production budget is the projected sales budget and adjusted for the change in inventory, first it is necessary to determine if the company can produce the quantities projected by the sales budget, in order to avoid an exaggerated cost at hand of busy work.

Process:

Develop a production schedule Budgeting sales by production line.

Development of a production schedule

It consists of estimating the time required to carry out each activity, avoiding unnecessary spending on the payment of employed labor.

Labor budget (PMO)

It is the diagnosis required to have a diversity of human factor capable of satisfying the planned production requirements.

Indirect labor is included in the manufacturing indirect cost budget, it is essential that the person in charge of the personnel distribute it according to the different stages of the production process to allow 100% use of the capacity of each worker.

Components:

Diverse staff Number of hours required Number of quarterly hours Value per unit hour

Manufacturing expenses budget

They are estimates that directly or indirectly intervene in the entire stage of the production process, they are expenses that must be charged to the cost of the product.

Lift:

Man-hours required. Machine and equipment operability. Stock of accessories and lubricants.

Observations.- this budget must be coordinated with previous budgets to avoid unnecessary spending that cannot be reversed later.

Production cost budget

They are estimates that specifically intervene in the entire unit manufacturing process of a product, which means that from the total budget of the material requirement, the amount required by type of line produced must be calculated, which must agree with the production budget.

Characteristics:

Only the materials that are required for each line or mold should be considered. The cost must be estimated. Not all require the same materials. The final value must match the unit cost established in the production cost.

Materials requirement budget (PRM)

They are estimates of purchases prepared under normal production conditions, as long as there is no lack of materials, this allows the amount to be set on a certain standard for each type of product as well as the amount budgeted for each line, it must respond to the requirements of production, the purchasing department must prepare the program that agrees with the production budget, if there is a need for a greater requirement, the flexibility of the first budget will be taken for a timely expansion and thus cover the production requirements.

Sales expense budget (PGV)

It is the most careful Budget in its management due to the expenses it causes and its influence on financial spending.

It is considered as projected estimates that originate during the entire commercialization process to ensure the placement and acquisition of the same in the consumer markets.

Characteristics:

Understand all Marketing. It is the basis for calculating the Profit Margin. It is permanent and expensive. Ensures the placement of a product. Wide consumer market. It is done at all costs.

Disadvantages:

It does not generate profitability. It can be misused.

Administrative Expenses Budget (PGA)

Considering as the core of every budget because most of it is allocated; They are estimates that cover the immediate need to have all types of personnel for its different units, seeking to make the system operational.

It must be as austere as possible without implying a delay in the management of the company's plans and programs.

Characteristics:

Remunerations are set according to the economic reality of the company and not in parallel with inflation. They are indirect expenses. They are expenses considered within the price that is set for the product or service. Regulate its legal aspect in current labor legislation.

Observations

To calculate the net total, the deduction of withholdings and contributions by law of each country must be calculated to the total.

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