Knowing how much to spend — and when to spend it — is one of the major challenges of running a business. A strategically prepared master budget can help guide key spending decisions.
A master budget charts out what a company should be spending each month in order to achieve its goals. Putting capital to work in a calculated, thoughtful way will give you a better shot at reaching your desired business outcomes.
What is a master budget?
A master budget is a company’s central financial planning document. It typically covers a full fiscal year and includes “lower-level” budgets — like a sales budget and a labor budget — cash flow forecasts, financial statements, and a financial plan.
Your company’s size, how long you’ve been in business, and what you do will help determine which master budget components you need.
Income-generating activities are listed out in a sales budget, while annual expenses are documented in labor, general administrative, and production budgets. The inputs of all of these budgets are used to compile high-level financial statements that show a company’s total sales, expenses, and profits.
If you want to get funding for your business, lenders will ask to see your financial statements. So it’s important to carefully project and update your budgets.
What does a master budget consist of?
The typical building blocks of a master budget include:
Sales budget: The sales budget estimates how much of your product or service you expect to sell for the year, on a quarterly basis. This number should be informed by the macroeconomic environment as well as sales patterns from previous years, if available.
Labor/hiring budget: Includes employee salaries and benefits and all human resources costs.
Overhead/general administrative budget: Includes fixed and variable overhead costs, like rent for office space, utilities, and business insurance.
Cash budget: The cash budget should list all cash coming in and going out of the business on a quarterly basis, separated by spend category. It should also include loans and when the business plans to repay them, as well as associated interest rates.
Production and manufacturing budgets: A production budget shows how many units of a product you’ll need to make, based on your sales forecast. A manufacturing budget includes the costs of all raw materials needed to make the products.
Production and manufacturing budgets don’t apply to every company. Services companies, for example, don’t need these types of budgets.
Budgeted financial statements: The above budgets are used as inputs for financial statements, such as an annual income statement, balance sheet, and cash flow statement.
Purpose of a master budget
A master budget provides insight into where a business is heading from a financial perspective. It’s a framework for understanding revenue, profit, expenses, and debt load, and it shows how a company is putting its capital to work.
“A lot of people think budgeting is penny-pinching, but that’s not really what it is,” says Steve Lord, a managing director at financial services firm Burkland.
“It’s understanding how much it’s going to cost to do what you want to do, and when it’s going to cost it.”
Budgets allow business leaders to have informed conversations about the company’s expenses. If you don’t flesh out what you’re going to spend on each part of the business, you’re probably not putting your money to use strategically.
Master budgets also impose “spend discipline” — a commitment to spend a certain amount and to not spend over that amount. A master budget is meaningless if company leaders don’t feel beholden to it. “If it’s not going to be a forcing function on spend control, then it’s not a budget. It’s a spreadsheet with some numbers on it.”
How to prepare a master budget
Master budget process
Lord’s firm helps venture-backed startups create financial plans and master budgets. He shared his process with The Hustle below.
Define your goals
Lord says his first step is to clarify his client’s high-level goals for the year. Is the company, for example, trying to put VC dollars to work and grow quickly? Or does it need to be cash flow positive this year?
You’ll budget differently depending on what you’re trying to do.
Once these aims are clarified, have your CFO, or finance leader, meet with your department heads individually, and talk about their specific functional goals. These include goals around sales, product developments, growth rate, hiring, etc.
The CFO should then ensure that department heads are aligned on each other's functional goals, and that all goals support the company’s main high-level direction for the year.
If you don’t have a CFO and it’s just you and your buddy, make sure the two of you are on the same page about your priorities for the year.
Figure out your costs
Once you set your missions, it’s time to figure out what it’s going to cost to meet your goals.
Look at the resources your company has, figure out where the gaps are, and help suss out realistic budget numbers based on time and resource constraints.
For example, in a perfect world, you might want to hire 20 engineers in January to meet your growth goal, but that’s probably not realistic, given how time-consuming and expensive hiring is. So you’ll need to negotiate with your head of engineering.
“These conversations are where the budget starts to take shape,” Lord says.
Once dollar amounts are associated with each individual budget item, get your company leaders together and have everybody sign off on the master budget.
It’s important for everyone to commit to spending the amount agreed to. If, for example, you end up needing $50k more for marketing than you estimated, you should get it from somewhere else in your budget, rather than just spending it without reducing the number elsewhere.
“That’s what really makes it a budget versus a spreadsheet — that spend discipline,” Lord says.
Assess how it’s going
A budget is not a “set it and forget it” type of document. It should be reviewed, assessed, and updated on (at least) a quarterly basis to see how things are going.
Throughout the year, founders and financial leaders should be asking questions like:
-
Are we spending what we committed to spending?
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Are we spending in the right places?
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Are we achieving our desired outcomes?
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Have our priorities changed?
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Do we need to allocate capital differently to meet our goals?
Master budget examples
Here are a couple examples of budgets you’d find inside a master budget (all numbers are hypothetical).
Note: You’ll want to prepare your budgets in a master spreadsheet using sub-sheets for different budgets.
Sales Budget
| Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
Annual |
|
| Forecasted sales (in units) |
1,000 |
1,500 |
2,000 |
3,000 |
7,500 |
| Price per unit |
$15 |
$15 |
$15 |
$15 |
$15 |
| Total gross sales |
$15,000 |
$22,500 |
$30,000 |
$45,000 |
$112,500 |
| Sales discounts and allowances |
$1,500 |
$2,250 |
$3,000 |
$4,500 |
$11,250 |
| Sales revenue |
$13,500 |
$20,250 |
$27,000 |
$40,500 |
$101,250 |
Source: AccountingTools
General Admin Budget
| Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
Annual |
|
| Advertising |
$1,000 |
$2,000 |
$2,000 |
$2,500 |
$7,500 |
| Insurance |
$400 |
$400 |
$400 |
$400 |
$1,600 |
| Rent |
$6,000 |
$6,000 |
$6,000 |
$6,000 |
$24,000 |
| Utilities |
$500 |
$500 |
$500 |
$500 |
$2,000 |
| Total expenses |
$7,900 |
$8,900 |
$8,900 |
$9,400 |
$35,100 |
Source: AccountingTools
Master budget case study
Nandu Awatramani started one of India’s first Italian restaurants. He grew the business to 31 stores at its height, sold it in 2016, and then relocated to the US. Now he works as a growth coach, helping restaurant owners expand their businesses.
He attributes much of his success to thoughtful budgeting, but when Awatramani started out, budgeting wasn’t a big focus of his.
He had a budget but wasn’t reviewing it regularly or considering how he should be adjusting it. “I wanted to focus on food, quality, service, and expansion, because that to me was growth,” Awatramani recalls. “I was afraid that if I saw the real numbers, it would completely deflate my motivation and [I’d] maybe give up.”
When Awatramani recognized the link between budgeting and growth, he started to assess his budget more creatively.
“Look [at the numbers] to see where you did well, where you need to improve, and why you did well,” Awatramani says.
Try to identify specific actions you took to meet your projections, as well as what might have caused you to miss them. Then consider creative ways you can try to hit your numbers next quarter.
For example, maybe you overestimated your sales and over-spent on ingredients that ended up in the trash. Pull back on ingredient costs next month and make sure your spending is in line with an expected, conservative sales estimate.
Keeping close track of sales numbers and analyzing seasonal patterns can help you pinpoint the appropriate amount to spend on ingredients from week to week.
“You can either go in blind, or go in with eyes wide open,” Awatramani says. “The budget is a lens through which [you] can envision [your] year and have [your] eyes wide open, versus just hoping for the best.”
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