Operating, Financial & Master Budgets

Introduction

The Master Budget is the aggregation of all lower-level budgets produced by a company's various functional areas and departments. The Master Budget contains two main parts called the Operating Budget and the Financial Budgets respectively.  An operating budget is a detailed statement showing all the operational expenses and revenues (income) expected during a particular period of time. An operating budget indicates how much profit an organization will generate given the assumption of revenues and expenses for a specific future period of time. A financial budget is a financial plan which includes the cash receipts(inflows) and payments (outflows) that occur over a period of time.  Both the operating and financial budgets are made of several components or smaller budgets. This article is structured to provide the reader with a thorough understanding of Operating, Finance & Master Budgets and all of the sub-budgets under each. Please feel free to reach out to me if you have any questions.

Operating Budgets

A typical operating budget contains the following components:

Financial Budgets

In the financial budget, the emphasis is on obtaining the funds needed to purchase operating assets. It contains the following components:

Differences Between Operating & Financial Budgets

Master Budget Process

The master budget is composed of the Operating and Financial budgets, each with several sub-budgets. The process can typically flows as shown in the diagram below:

Conclusion

The Master Budget contains the Operating and Financial budgets. Each of these two main budgets contains an assortment of smaller component budgets. Understanding the development and process flow of all of these smaller component budgets is critical to developing a successful and accurate overall Master Budget. Please feel free to reach out to me if you have any questions.