A master budget collects all of the smaller budgets within a company to get an 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 master budget. This type of budget has both advantages and disadvantages.
Overall Business Budget
One of the main reasons why a master budget is created is to give the business owner and 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, a company executive would have to add all of the departments' budgets up to get one large budget to determine the overall earnings and spending of the company. The master budget reveals how much the company is earning and spending as a whole and shows whether the business is in good or negative financial standing.
Another advantage of having a master budget is the ability to identify problems and plan ahead. For example, the master budget can reveal if one department is spending beyond its limit, causing the company to spend more than it is earning each month. In order to repair this budget issue, company executives can identify which department is spending excessively by looking at individual department budgets and plan ahead, either by cutting the department’s expenses or by making other budget cuts in other departments for additional spending. It is more difficult to spot budget issues by only looking at individual department budgets.
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, the reader would not 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.
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.
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