Functional budget focuses on a particular area of a business.
When all the other budgets have been prepared, the master budget is then prepared because it provides an overall picture of the planned performance for a budget period.
The master budgets consolidate the individual budgets and present us with an overall financial picture, summarising the effects of our operational and strategic plans. The master budgets consist of:
- Income Statement
- Statement of financial position
- cash budget
This shows the budgeted income, cost and profitability of a company. It provides the overall impact in financial terms of our future objectives, and usually the first produced income statement will not be our final version. Careful evaluation of budgeted profitability is necessary, in order to make us aware of the alternative strategies or key budgets that might need reconsidering.
Statement of financial position
The budgeted statement of financial position is finalised after the income statement is approved. The statement of financial position helps evaluate the financial position, for example the working capital or gearing position. A sound financial position is as crucial as profitability to the survival and success of a business.
Cash can be considered as the lifeblood of a business. The insufficient or inadequate control of cash is the main reason for business failure. The cash budget indicates what future cash and funding requirements will be available in light of budgeted objectives. The business will then be able to take appropriate action in light of what the cash budget reveals.