A master budget is used to project the income and expenses of a company. From the master budget, a small-business owner can develop a variety of reports to help set specific goals for the business. The major components of a master budget include income and expenses, overhead and production costs, and the monthly, annual, average and projection totals.
The Business Income Component
One of the two main components of a master budget is income. This includes your sales and any interest, dividends, royalties or other capital gains you earn. If you are not using these latter forms of income to run your company, leave them off your master budget, making it an operating budget focused on income from sales. Some master budgets include a bad debt entry, calculating it using a percentage of the sales income.
The Company Expense Component
The other main component of a master budget is expenses. Many small-business owners create sub-components of the master budget expenses to help calculate spending areas that can be cut during slow times or to help calculate production and overhead costs. After you’ve listed all of your expected expenses for the year, label each as a fixed or variable cost. A fixed cost is one you can’t easily change from month to month, such as your rent, insurance premium, loan payment or copier lease.
You will be more likely to be able to cut variable expenses if you’re short on cash, because many of these are discretionary. Designate recurring variable expenses you can’t easily cut, such as utilities, phone bills or labor, differently than variable expenses you can’t modify, so you can quickly find places to cut when the need arises. To create a flexible budget, use formulas that change your discretionary spending based on your income.
Overhead and Production
Once you complete a master budget, break out your production and overhead costs to help with pricing your product or service. Identify costs directly tied to making each unit or delivering each service. Depending on the type of business, these costs might include machinery, materials, extra energy or labor. Mark these as production costs. Identify non-production costs, such as marketing, phones, office supplies, and general and administrative costs and mark these as overhead expenses.
Net Income or Loss
A common component of a master budget is the "Total" function, which shows you how you are doing each month and for the year. You can total your income and expenses by month to show your net income or loss each month. You can also total your income and expense by category to see how a particular area of your company is performing.
Use totals to track your monthly income and expenses. Totals help manage your cash flow better if you prepare a separate budget that shows when bills are due and when income is expected, rather than using monthly averages. For example, instead of dividing your insurance premium costs by 12 and putting the average in each month’s expenses, enter insurance premium payments only in the months they are due.
Project Annual Performance
A helpful component of many budgets is the projection total column, which shows you how you’ll end the year if you continue performing at your current levels of income and spending. These can be skewed if you have large expense or income amounts early in the year. Looking at your performance for a particular month usually isn’t a realistic indicator of your overall performance, because you will have more bills due in some months.
Periods of higher bills can include the beginning of the year when fees are due, dates when quarterly insurance premiums or taxes are due, or times when you have seasonal sales peaks and valleys. Averaging your monthly income and expenses can help you project your annual performance if you don’t have seasonal swings and your expenses are fairly steady.
Other Budgets and Report
Some businesses create the master budget in conjunction with other budgets, such as sales, marketing, general and administrative, production, labor, materials and overhead. This allows each department to amend its numbers, updating the master budget when they do, which alerts management to any problems or opportunities that occur when departments or functions change their performance.
