The key difference between master budget and cash budget is that master budget is a financial forecast that consists of all the revenues and expenditure whereas cash budget records the predicted results of cash inflows and outflows for the accounting period. Therefore, cash budget becomes a component in the master budget. Budgets are used as a main yardstick to estimate as well as to control performance; thus, they are considered vital to organizational success.
CONTENTS
1. Overview and Key Difference
2. What is Master Budget
3. What is Cash Budget
4. Side by Side Comparison – Master Budget vs Cash Budget
5. Summary
What is Master Budget?
Master budget is a financial forecast of all elements in the business for the accounting year prepared by aggregating a number of other functional budgets. These different budgets are interrelated in nature and collectively provide accounting estimates for the upcoming financial period. Individual budgets will be prepared by each department and the net outcome will be recorded in the master budget.
There are two main components in the master budget, namely operational budget, and financial budget.
Figure 1: Components of Master Budget
As an explanatory text, which includes an explanation of company’s strategic direction, the role the master budget will play in the achievement of company objectives and the management actions intended on attaining the said objectives is usually provided. Master budgets are usually presented in monthly or quarterly formats for the entire financial year. Various other documents can also be presented along with the master budget in order to assist informed decision making. A document that consists of key financial ratios calculated based on information is included in the budget. These ratios will help to understand whether the master budget has been prepared realistically based on the actual past results.
Master budget preparation requires inputs of personnel from all the departments in the organization. There is a tendency of departmental managers to overestimate expenditure and underestimate revenues in order to achieve the budget easily. Further, since business environments are constantly changing, budgets are often criticized as too rigid to adhere to.
What is Cash Budget?
Cash budget projects the expected cash inflows and outflows of the business for the upcoming year. The main purpose of this budget is to ensure that sufficient liquidity is guaranteed for the period. If a company does not have enough liquidity to operate, it must raise more capital by issuing shares or by taking debt.
Net cash flow forecast will be calculated as the difference between cash inflows and outflows. If there is a negative cash flow, this will project that the company is likely to experience difficulties in running routine operations at a certain point. Some of the contributing factors to such a situation may be,
- Accounts receivables taking an increased time period to settle due monies
- The company is settling accounts payable way ahead of the credit period granted by them
- There are a number of idle assets that do not generate economic activity
By providing solutions to minimize the negative impact of above situation, the cash flow situation of the company can be improved.
Below is the format of a cash budget.
What is the difference between Master Budget and Cash Budget?
Master Budget vs Cash Budget |
|
| Master budget is a financial forecast that consists of all the revenues and expenditure. | Cash budget records the estimated results of cash inflows and outflows for the accounting period. |
| Components | |
| Master budget is a collection of many sub-budgets. | Cash budget is a component of the master budget. |
| Net Result | |
| Net result of master budget is referred to as net profit or net loss. | Net result of cash budget is referred to as surplus or deficit. |
Summary – Master Budget vs Cash Budget
The difference between master budget and cash budget mainly depends on the purpose that they are prepared for. The budget prepared by amalgamating all the sub-budgets is referred to as the master budget whereas the budget that includes forecasts of cash inflows and outflows is referred to as the cash budget. If budgets are used effectively, they can enable a wider range of benefits including revenue growth and effective cost control.
References:
1.”Master Budget.” AccountingTools. N.p., n.d. Web. 26 Mar. 2017.
2.Jan, Irfanullah. “Master Budget.” Master Budget Introduction | Components | Managerial Accounting. N.p., n.d. Web. 26 Mar. 2017.
3.”Cash Budget.” Investopedia. N.p., 22 May 2015. Web. 27 Mar. 2017.
4.Newman, Pam. “7 Ways to Improve Liquidity.” Entrepreneur. N.p., 29 Nov. 2007. Web. 27 Mar. 2017.
5.Jan, Irfanullah. “Cash Budget.” Cash Budget | Format | Example | Master Budget. N.p., n.d. Web. 27 Mar. 2017.