The benefits and drawbacks of a master budget can be summed up as follows. A master budget offers an understanding of the company's objective and the necessary actions to achieve it. Furthermore, it aids in more realistic projections of future cash flows, which assists in securing specific types of financing. In essence, a master budget formalizes planning, establishes criteria for assessing performance, and enables efficient communication and coordination among managers.
However, there are also disadvantages connected with a master budget.
Creating a budget can be time-consuming, especially for smaller companies with limited staff. These companies may struggle to develop a comprehensive master budget due to their size and resources. In addition, there may be a lack of involvement in the budgeting process and a reluctance to take responsibility for the final budget. The temptation to manipulate the budget or engag
...e in dishonest practices further complicates matters. Another challenge lies in obtaining accurate sales forecasts, as highlighted by Karthik (retrieved from http://www.accountingformanagement.com/the_master_budget). It is crucial to recognize the key inputs and their significance when considering the master budget.
The master budget, which consolidates the planned activities of all subunits within an organization, is a comprehensive analysis of the first year of a long-range plan. It includes forecasts for sales, expenses, balance sheets, and cash receipts and disbursements (Horngren, Sundem, Stratton, Burgstahler, ; Schatzberg, 2008,p. 304). It has two main parts: the operating budget focuses on the income statement and supporting schedules while the financial budget emphasizes the impact of the operating budget and other plans on cash flow such as capital budgets and debt repayments. Therefore, it is necessary for a company to create a
master budget.
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