The purchasing manager at Jerry’s Ice Cream usesthis information, along with the price per pound, to negotiate thepurchase of materials with suppliers. Unit sales are expected to increase 25 percent, and each unit isexpected to sell for $8. The management prefers to maintain endingfinished goods inventory equal to 10 percent of next quarter’ssales. Assume finished goods inventory at the end of the fourthquarter budget period is estimated to be 9,000 units.

Example: Master Budgets for Different Businesses

• The sales budget5 is an estimate ofunits of product the organization expects to sell times theexpected sales price per unit.
• Somecompanies pay for market trend data to learn about industry andproduct trends.
• Forecasting sales often involves extensive research and numeroussources.
• Its real value comes from connecting an organization’s strategy, operations, performance monitoring, resource planning, and financial accountability.
• Notice thesimilarity of this equation to the inventory equation presentedearlier for the production budget.
• The operating budget, capital expenditure (CapEx) budget, and cash budget combine to form the master budget.

As we work through the master budget for Jerry’s IceCream, assume the company prepares quarterly budgets. The cash budget estimates the timing and amount of cash inflows and outflows over the budgeting period. FP&A professionals use the cash budget to plan for the cash needed to cover operating costs and other payments.

Direct Labor Budget

The operating budget, capital expenditure (CapEx) budget, and cash budget combine to form the master budget. Each one plays a specific role in helping a company retained earnings balance sheet plan for revenue and expenses, long-term investments, and cash needs across the budgeting period. Each unit of product requires 0.20 directlabor hours at a cost of $12 per hour. Forecasting sales often involves extensive research and numeroussources.

Sales Budget

FP&A professionals carefully build each of these component budgets, then combine them to form the master budget.

Manufacturing Overhead Budget

Figure 9.2 shows how companies obtain sales informationfrom sales people, market research consultants, and economists. Its real value comes from connecting an organization’s strategy, operations, performance monitoring, resource planning, and financial accountability. Depreciation is deducted at the bottom of the manufacturingoverhead budget to determine cash payments for overhead becausedepreciation is not a cash transaction. Understanding the master budget and its components is a critical step law firm chart of accounts in building a budgeting process that aligns strategy with planning and resource allocation. A company’s budget committee develops and approves a master budget for the organization. This committee typically includes senior management, the CFO and FP&A team members, and other department heads.

Somecompanies pay for market trend data to learn about industry andproduct trends. Many organizations hire market research consultantsto obtain and review industry data which budget is prepared first and is the cornerstone of the master budget? and ultimately to predictcustomer demand. Larger companies sometimes employ economists todevelop sophisticated models used to project sales. Smaller, lesssophisticated organizations simply base their estimates on pasttrends.

Why the Master Budget is Important for FP&A and Strategy

Once finalized, the master budget produces a complete set of forecasted financial statements, including the income statement, balance sheet, and cash flow statement. Explore CFI’s courses tailored for FP&A professionals and start building the expertise you need to excel in strategic financial planning. The CapEx budget is a plan for significant investments in long-term assets, such as new equipment, property upgrades, or technology systems. It helps prioritize investments that support growth, while making sure the timing and cost of those projects fit within the company’s overall financial plan. How do finance professionals translate business goals into a comprehensive financial plan?

They also use it to estimate how much cash the company expects to receive during the period. The master budget plays a central role in financial planning and analysis (FP&A). It brings structure to the budgeting process by combining operating, capital expenditure (CapEx), and cash budgets into one coordinated plan. The sales budget5 is an estimate ofunits of product the organization expects to sell times theexpected sales price per unit. This is perhaps the most importantbudget as it drives most of the other budgets. For example, theproduction budget and related materials, labor, and overheadbudgets are based on expected sales.

Study Figure 9.1 carefully, as it serves as the road map for themaster budget presented throughout this chapter for Jerry’s IceCream. Also, note that the budgets described next are for amanufacturing company. Manufacturing companies tend to have morebudget schedules than other types of organizations because theiroperations are more complex.