The master budget is the starting point of any business strategy. It is a document that documents both the income and expenses that the company expects to have, as well as the expected capital investments and debts.
When making a master budget, entrepreneurs must take into account the cash flow forecast, the profit and loss account, as well as the organization’s balance sheet. The company will have difficulty making the right decisions if it does not have this document.
Experts from EAE Business School emphasize that the master budget is the strategic plan that establishes the direction in which the company is headed. It documents every aspect of the company’s operations so that different predictions can be made.
One of the main applications of the master budget is to make long-term strategic decisions and others that have to do with the current year. In fact, many companies use it primarily as a planning tool.
However, the master budget can also be used to measure the company’s performance. The master budget measures the performance of the organization as a whole. In fact, it helps improve efficiency and facilitates control in the departments of the company and encourages interdepartmental cooperation.
Although its use is more frequent in large companies, SMEs can also use the master budget to improve the achievement of their objectives. In fact, the master budget identifies the unusual problems that occur in the company and helps to resolve them quickly. For example, if one of the company’s divisions is not working well and the expenses incurred exceed the established budget limit, thanks to this document a drop in the company’s profitability can be avoided.
It should be noted that the master budget is especially useful for ensuring that the organization’s resources are well channeled and controlled in order to always optimize the benefit obtained from them. It is, therefore, a very necessary instrument for companies of any size.