So how much fun is budgeting? Hopefully, you have a better understanding of the working parts of a master budget.  The master budget is the central planning tool used by companies to assess performance of each individual component of the business.

If you remember, when we looked at the sales budget, we determined how many pair of shoes Hupana Running Company would produce. We can now hold our sales department responsible, since they had a hand in preparing that information, for sales numbers. They have a goal to reach!

Then, we pass that information off to our production folks! With a sales number in hand, they can determine how best to use the facilities to meet sales projections. Then the purchasing department gets the information to determine a raw materials budget. This budget allows them to work with suppliers to secure the best pricing.

Now onto labor! Once we know how many we are making, and when we plan to make them, staffing plans can be made to most effectively use our payroll dollars. Then we can figure out, based on our labor hours, how much of our overhead (both fixed and variable costs) are allocated to each pair of shoes we produce.

There are those pesky administrative expenses. Without the office and sales people, we would have no business, right? So we now have the data to put that information together.

With all of these smaller components in hand, we can put together a cost flow plan, and and income statement and balance sheet to see the income and overall financial health of the company.

One missing piece and we can’t get good numbers. See why a budget is so important?