Difference Between Master Budget and Cash Budget

A spending plan determined by income and expenses is called a budget. Put otherwise, it represents an approximation of the total amount of money you will earn and spend for a specific time frame, such as a month or a year. Creating a detailed record of all of your expenses or concentrating on a select few can be part of budgeting. While some use a spreadsheet or budgeting tool, others would rather write out their budget by hand. There is no one right approach to budget; what suits one individual may not suit another.

Everyone benefits from budgeting, not only those with low incomes. It helps you determine what is consuming an excessive amount of your money and motivates you to use your money as efficiently as possible. To comprehend the big picture and the relationships between the many budget kinds, one must be knowledgeable about them. There are several kinds of budgets, but mainly cash budget and master budget.

The budgets are described as below;

A master budget is an overarching financial and operational strategy for an upcoming fiscal or calendar year. It is usually prepared quarterly or annually and summarizes the business's planned activities. The master budget is actually several sub budgets combined into one. The size and type of the company determine the master budget's format.

For cash control and planning the cash budget is utilized. It displays the anticipated influx and outflow of funds for the specified time frame. The cash budget assists management in preventing idle cash and potential cash shortages, as well as in maintaining a fair cash balance relative to company needs.

Master Budget

Definition Of Master Budget

Comprising planned financial statements, a cash projection, and a financing plan, the master budget is the culmination of every budget at the lower levels generated by the many functional departments of a corporation. The master budget usually spans a company's whole fiscal year and is given in either a quarterly or monthly manner. The master budget may be accompanied by an explanation text that outlines the strategic direction of the business, how it will help achieve particular objectives, and the management measures required to meet the budget. The adjustments to headcount needed to meet the budget may also be discussed.

The primary planning instrument utilized by a management team to guide an organization's operations and assess the effectiveness of its different responsibility centres is the master budget. The senior management team usually reviews several versions of the master budget and makes adjustments until it reaches a budget that allots money to produce the intended outcomes. A corporation hopefully creates this final budget through participatory budgeting, but it can sometimes be imposed by upper management with little participation from staff members.

A master budget is created when a business goes through a merger or acquisition process in order to determine what benefits the acquiring company would provide. Every business, for example, has an administration and HR department. Thus, in the event of an acquisition, two employees would fall into the same group.

Here, the business must set a budget and determine which employees to retain and which to let go of to improve operations. To avoid surprises, management must create this budget before moving forward. As a result, after taking into account the existing loan rates, cash flows, and debt limits, the master budget contains comprehensive information about the projected future financial statements and cash flows.

Components Of Master Budget

A master budget provides a comprehensive financial picture by gathering all of the anticipated income and expenses in one location. By using this kind of planning, people learn about their financial responsibilities and what's left over after all expenses are taken out. The operating budget and the finance budget are the two primary components of the master budget.

Operating Budget: It has to do with how the business operates and comprises the money made and the costs spent. The budgeted income statement, which shows the revenue-generating activities conducted within an organization, is how this is displayed.

Financial Budget: It displays details regarding the company's financial situation. Additionally, it is a representation of the cash budget, which provides details on available funds. By using the operating budget data to create a budgeted balance sheet, the financial budget is created.

Example of Master Budget

A master budget is created when a business goes through a merger or acquisition process in order to determine what benefits the acquiring company would provide. Every business, for example, has an administration and HR department. Thus, in the event of an acquisition, two employees would fall into the same group.

Here, the business must set a budget and determine which employees to retain and which to let go of to improve operations. To avoid surprises, management must create this budget before moving forward. With current loan rates, cash flows, and debt restrictions taken into account, the master budget thus contains comprehensive information about the projected future financial statements and cash flows.

Cash Budget

Definition of Cash Budget

An organization's projected cash flows over a given time period-weekly, monthly, or yearly-are estimated in a cash budget. Finance experts frequently use these budgets to assess if their organization has sufficient funds to cover its activities for the given time frame. It shows where and when a firm produces money as well as how much it spends, which aids in professionals' ability to forecast when the organization may require additional funding. Using these budgets, which often contain income and expenses and display the amount of money available to the company, can assist businesses in cutting costs without compromising their regular operations.

If a company has a positive cash budget, it indicates that it may have money left over after covering all of its costs and could even have extra money at the end of the budget period. For example, this amount might be sufficient to save for subsequent purchases or pay off current debt. Businesses may also utilize this excess to finance the purchase of new office supplies or business equity.

An expense that exceeds revenue for the company is referred to as having a negative cash budget. It might have less money available in this situation for other uses. One instance of a cash flow deficit is when goods or services are sold on credit. As long as a company's cash flow is negative but not excessive, it might occasionally be acceptable. Purchasing business equipment, for instance, is an investment rather than a cost because it might boost output and efficiency down the road. Thus, even if this expenditure presently reduces a business's cash budget, it can eventually result in higher earnings.

Components Of Cash Budget

A cash budget's principal elements are its cash inflows and outflows. These provide the budget period's beginning and ending cash balances.

Cash Inflows: These are the common revenue sources that support the cash flow of your company.

#1. Sales Revenue: Projections for sales revenue calculate the amount of money made from the sale of products or services. Forecasting sales accurately is essential for budgeting financial inflows. Making accurate revenue estimates can be aided by market research, sales patterns, and historical data. The extra revenue might be taken into account in the cash flow estimates, for instance, if you introduce a new product during the budgetary period and anticipate a 10% rise in sales.

#2. Other Sources of Income: Businesses can earn money from various secondary sources in addition to their core operations. These could include royalties, licensing fees, rental income, and other sources of additional income. Including these sources in the cash flow section provides a more thorough picture of the company's cash inflows.

#3. Returns On Investments: You might own bonds, stocks, or other types of financial securities. Interest from bonds and stock dividends are examples of investment returns that go toward total cash inflow. It gives insight into the company's passive income, and these returns are included in the cash flow column. The cash flow predictions need to account for things like holding stocks in other companies and receiving cash dividends.

Cash Outflows: These sum together all of your company's projected costs. They are included in the budget's cash outflow section. For your company to have positive cash flow, cash outflows must be smaller than cash inflows.

#1. Operating Expenses: These are the costs incurred by the firm on a daily basis. They cover costs for purchasing raw materials, keeping inventory, paying employees' salaries and benefits, and paying utilities and overhead. Monitoring and reining in these costs is essential to keeping cash on hand. For instance, you can improve cash flow by lowering the cost of raw materials through better supplier negotiations and inventory optimization.

#2. Capital Expenditures: These are investments made in long-term assets like machinery, property, or equipment. Even if these expenditures are essential for company expansion, they may have a big effect on cash flow in the near future. The right balance between available cash resources and capital investments requires careful planning and budgeting.

#3. Repayment Of Debt: Repayment of debt entails returning loans or credit used for the expansion or operation of a business. It is imperative that you fulfill your debt commitments punctually to preserve your credit and avoid incurring further expenses. For instance, establishing a repayment plan in line with the company's cash flow cycle might assist in satisfying debt commitments without sacrificing immediate liquidity.

Example of Cash Budget

In New Jersey, Elvis owns and operates a grocery. Elvis' payment schedule is very busy since different suppliers provide different goods to meet Elvis' store's needs. Thus, he began adopting a cash budget statement after consulting with one of the vendors. The payments were made on schedule in the upcoming week as a result of the statement's improved clarity and the plans that were created to guarantee on-time payments.

Master Budget v/s Cash Budget

The primary distinction between a cash budget and a master budget is that the former documents the anticipated outcomes of cash inflows and outflows for the accounting period, while the latter is a financial projection that includes all revenues and expenses. Thus, the master budget includes the cash budget as a component. Budgets are essential to an organization's success because they serve as the primary benchmark for both estimating and controlling performance.

Bottomline

The primary distinction between a cash budget and a master budget is the purpose for which each is intended to be used. The term "master budget" refers to the budget that is created by combining all of the sub-budgets, while "cash budget" refers to the budget that is created using projections of payments and receipts. Effective budgeting can lead to a number of advantag0es, such as increased income and efficient cost control.

The master budget functions as a tool for employee incentive, allowing them to compare their actual and budgeted performance. It facilitates employee job satisfaction and makes a positive impact on the company's expansion. A cash budget aids in anticipating and preventing debt or cash difficulties. Gaining a greater grasp of your cash inflows and withdrawals, along with any excess cash, will help you establish emergency reserves and make smarter decisions about how to use your money. Deficits and debt may be avoided in this way.

A company or individual can save money by adhering to stringent spending guidelines when they use a budget in accounting. Accounting software or basic spreadsheets can be used to organize budgets. Comprehending financial data and adhering to the budget all year long are essential to a successful budget.