A master budget collects all of the smaller budgets within your company and compiles them into one overarching budget, so you can get a holistic overview of the business’ finances. The master budget includes the customer service, marketing and all of the other departments’ individual budgets to create a single overall budget. Like any other management tool, it has advantages and disadvantages.
Advantage: Bird's Eye View of the Business
One of the main reasons for a master budget is to give the business owner or company executives an overview of the company’s budget. Since smaller budgets for each department only cover the expenses and earnings for each individual area of the business, you'd have to add up all of those departments' budgets to see the overall earnings and spending of the company. The master budget reveals how much your company is earning and spending as a whole, and shows whether the business is in good or negative financial standing.
Advantage: Master Budget Equals Masterly Planning
Another advantage of having a master budget is the ability to identify problems and plan ahead. For example, the master budget can show you if one department is spending beyond its limit, causing the company to spend more than it is earning each month. To fix the problem, you can identify which department is spending excessively by looking at the individual department budgets. Then you'd either cut that department’s expenses, or make cuts in other departments to free up resources to cover that additional spending. It is more difficult to spot budget issues by only looking at individual department budgets.
Disadvantage: Lack of Specificity
One of the disadvantages of having a master budget is its lack of specificity. The dollar amounts and numbers written on the master budget are a collective sum of all of the departments’ expenses and earnings. For example, you wouldn't be able to determine how much the marketing department is spending on a monthly basis as the amount will be added to all of the other departments' spending as one sum.
Disadvantage: Difficult to Read and Update
Another disadvantage of a master budget is it's difficult to update. This is because of the many categories and numbers that are included in the budget. Due to the extensive descriptions and charts, a master budget can also be difficult to read and understand. Keep in mind that the master budget includes all expenses and income statements of the entire business, so this can be rather extensive if the business is a corporation or has hundreds of employees in many departments.
Based in Toronto, Mary Jane has been writing for online magazines and databases since 2002. Her articles have appeared on the Simon & Schuster website and she received an editor's choice award in 2009. She holds a Master of Arts in psychology of language use from the University of Copenhagen in Denmark.