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Is A Business Plan Related To A Master Budget?

A business plan and a master budget are some of the terms that a new business owner tends to struggle with. Common questions may be: Is the business plan related to the master budget? Is a master budget a business plan? Does a business plan have a master budget? At what point are any of these documents written down?

The questions can become endless and drive new business owners to panic and make unwise decisions. To understand if the business plan is related to the master budget, both must be defined and understood. Let's dive into both a business plan and master budget, unwrap them and make the terms easier to digest.

Business Plan

A business plan begins the business process.

What is a business plan?

A business plan outlines the business goals, explains how the team plans to achieve them, and gives an expected time frame to achieve these goals. This means a business plan is a roadmap for the business. It is important because without a roadmap, any direction is the right direction, and any destination will be just fine, which can lead any good business astray.

A business plan is written about three to 12 months after a business owner decides to start, expand, rebrand, re-establish or remake the business. However, before a business starts to run, it is usually prepared before it undergoes drastic changes or precedes expansions in business operations.

7 reasons a business plan is key to success

• It is the blueprint for the business. Without it, the business lacks shape, direction and structure.
• A business plan serves as a management and planning tool. It helps keep the team on track and ensures careful planning for each new stage of growth.
• It tests the technical, economic and practical feasibility of a business idea. Short of actually doing the business, nothing can really show if the idea is worth it. A business plan helps in this aspect by guiding a hopeful business owner through identifying, describing and analyzing a business idea.
• A business plan establishes business milestones: A good business plan will clearly map out long- and short-term milestones and keeps the business from veering off path. It guides the team as to what to do to hit the milestones set.
• It makes business planning manageable. With the clear outline of a business plan, planning each step of business creation, launching and running is easier.
• It attracts the right partners and employees. Having the business mission and vision outlined in the plan ensures that the right people are attracted to and hired for the job. Only people who resonate with what the business is trying to achieve will be interested in working there.
• A business plan helps secure funding and investors. A business plan can secure funding from banks, institutions, goodwill ambassadors and business investors through the financial budget, expected market and carefully written growth potential.

Master budget

A master budget gives a broad overview of the business finances.

What is a master budget?

A master budget is a combination of smaller business budgets and financial documents used for strategic planning for a business' future. It documents all expenses; production, sales, low-level management and purchases. It also includes all budgets, financial planning, projected sales, the organization's balance sheet and other business financial aspects. It is basically one huge financial document used for budgeting.

A master budget is the guardrails of a business, as it guides the spending habits and ensures the books remain balanced and business profitable. Since it combines an operational budget and a financial budget, it is usually prepared for the upcoming year. It contains the sales, production, material, labor, administrative, financial, overhead and cost of sold goods budget.

Reasons a master budget is key

• It is a useful tool for creating a strategic plan for the business. It identifies current and potential financial problems and shows potential sales growth areas.
• A master budget helps secure funding and investment. By compiling a detailed financial report, the team can put together a financial plan to secure funding from financial institutions, investors, donors and business aid societies.
• It helps motivate the staff. The master budget shows where the business is lacking and what the business is looking toward in financial growth. This, in turn, shows the staff, both management and lower levels, what work needs to be done to achieve these goals.

Key differences between a business plan and a master budget

• Although they both include the business' financial aspects, a master budget is far more detailed and delves into everyday finances and more.
• A master budget is usually compiled for the coming year, every year of business, especially in the production industry. On the other hand, a business plan is prepared before the business is operational. Or before the business undergoes serious changes like a shift in management, a product overhaul, a reworking of the business model, etc.
• A master budget looks solely at the financial aspect of the business. In contrast, a business plan looks at every aspect of the business, from operations to marketing, finances to management, and so on.

When starting a new business, the master budget will come after a business plan. This is because businesses can use detailed financial documents when doing their financial planning. A business plan is related to a master budget with regards to securing financing for a business. Other than that, a business plan and a master budget are two different entities of a business.

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Master Budgeting Explained: Component, Examples, and How to Prepare

Master budgeting is a vital process that allows businesses to plan and manage their finances effectively. A master budget is a comprehensive financial plan that outlines a company’s revenue, expenses, and cash flow over a specific period, usually one year.

This blog post will delve into what a master budget is, its importance for businesses, who is responsible for creating it, and what skills they need. We will also discuss the key components of a master budget, provide an example, and look at some of the common challenges businesses face when preparing a master budget.

Additionally, we will explore why it is essential to review and adjust the master budget regularly, how businesses can plan for contingencies and unforeseen events, and the ethical considerations that businesses should consider when preparing their master budget.

Lastly, we will explore how businesses can leverage technology and software tools to streamline and automate the master budgeting process .

So, whether you are a business owner, manager, or financial professional, this comprehensive guide will equip you with the knowledge and skills necessary to create a master budget that aligns with your strategic goals and helps you achieve long-term financial success.

What Is a Master Budget and Why Is It Important for Businesses?

A master budget is a comprehensive financial plan that integrates all lower-level budgets and provides an overview of a business’s financial activities for one year, usually one year. The master budget includes budgets for revenue, expenses, capital expenditures, and cash flow . It serves as a roadmap for the business’s financial activities and guides the decision-making process of managers and executives.

A master budget is essential for businesses for several reasons. First, it provides a holistic view of the organization’s financial activities, enabling managers and executives to make informed decisions based on the available financial resources. Second, it helps businesses align their financial goals with their strategic objectives . By preparing a master budget, businesses can determine their financial priorities and allocate resources accordingly.

The master budget includes all the lower-level budgets, such as sales, production, marketing, and cash. The sales budget forecasts expected sales revenue for the budget period. It is based on historical sales data, market trends, and other relevant factors such as consumer behavior, economic conditions, and competition. The production budget is a plan for producing goods and services required to meet the sales targets set in the sales budget. It considers the expected product demand, production capacity, and inventory levels.

The marketing budget outlines the resources required to promote the business’s products or services and reach the target audience. It includes expenses such as advertising, promotions, and public relations. The cash budget is a plan that projects the business’s cash inflows and outflows for the budget period. It helps businesses ensure sufficient cash to meet their financial obligations, such as paying suppliers, salaries, and taxes.

In addition to the lower-level budgets, the master budget also includes budgets for capital expenditures and overhead costs. The capital expenditures budget outlines the business’s investments in long-term assets such as buildings, equipment, and technology.

It helps businesses plan for major investments and determine their impact on the organization’s financial position. The overhead cost budget includes rent, utilities, and insurance. It helps businesses determine their fixed costs and plan for their ongoing expenses.

One of the most significant benefits of a master budget is that it provides a framework for measuring financial performance. By comparing actual financial results to the budgeted figures, businesses can identify areas where they exceed or fall short of their financial goals. This process is known as variance analysis . Managers can use this information to adjust their financial plans and improve performance.

Another benefit of a master budget is that it helps businesses manage their cash flow effectively. By projecting their cash inflows and outflows, businesses can determine when they may experience cash shortages or surpluses. They can take necessary steps to manage their cash flow, such as delaying payments or arranging short-term financing.

Who Is Responsible for Creating a Master Budget, and What Skills Do They Need?

Creating a master budget usually falls on the finance department or a team of financial analysts. These individuals need specific skills to ensure the master budget is accurate and reliable.

The finance department is responsible for creating a master budget because they are the ones who have access to financial data and are familiar with the financial operations of the business. The finance team typically consists of financial analysts, accountants, and other professionals with a finance and accounting background.

To create a master budget, the finance department needs to have several skills. First, they need to understand financial statements, such as the income statement, balance sheet , and cash flow statement. These financial statements provide valuable information that is used to prepare the lower-level budgets and the master budget.

Second, they must have excellent analytical skills to analyze financial data and make informed decisions based on the available information. The finance team must analyze historical financial data, market trends, and other relevant factors to prepare accurate budgets.

Third, they must have excellent communication skills to work with other departments and stakeholders. The finance department needs to collaborate with other departments, such as sales, marketing, and production, to gather information and ensure that the budget is aligned with the business’s strategic objectives.

Fourth, they need to have excellent budgeting skills. Preparing a master budget requires developing accurate revenue, expense, and cash flow forecasts based on historical data and market trends. The finance team needs to be able to identify potential risks and opportunities and create contingency plans to mitigate risks and capitalize on opportunities.

Fifth, they need strong organizational skills to manage the budgeting process effectively. Preparing a master budget involves several steps, such as creating the sales forecast, production plan , and marketing budget. The finance team must ensure that all these steps are completed accurately and on time.

Sixth, they need to deeply understand the business’s industry and market. The finance team needs to know the trends, competition, and regulatory environment that could impact the business’s financial performance.

Seventh, they need to have the ability to use budgeting software and tools effectively. Preparing a master budget requires various software and tools, such as spreadsheets, financial modeling software, and budgeting software. The finance team must have the technical skills to use these tools efficiently.

Creating a master budget is a complex process requiring a skilled professional team. The finance department or financial analysts responsible for creating the master budget must have a strong understanding of financial statements, excellent analytical skills, effective communication skills, budgeting skills, strong organizational skills, and a deep understanding of the business’s industry and market. 

They must also have the ability to use budgeting software and tools effectively. With these skills, the finance team can create an accurate and reliable master budget to guide the business’s financial activities and decision-making process.

When Should a Business Start Preparing Its Master Budget, and How Often Should It Be Updated?

Businesses must determine when to start preparing the master budget and how often to update it to ensure it is accurate and reliable.

When to Start Preparing the Master Budget?

The best time to prepare a master budget depends on the business’s fiscal year and financial planning cycle. Most businesses prepare their budgets annually, while others do it quarterly or bi-annually. Ideally, businesses should start preparing their master budget at least three months before the start of the fiscal year. This allows enough time to gather relevant financial data, analyze historical trends, and make informed decisions about the budget’s revenue and expense forecasts.

However, some businesses may need to prepare their budget earlier, especially if they operate in industries with seasonal fluctuations in demand or supply. For example, a retail business may need to start preparing its budget four to six months before the start of the fiscal year to factor in the holiday season’s sales volume.

In addition to the fiscal year, businesses should consider external factors that may impact their financial performance. For example, changes in the market, regulatory environment, or competition can affect the business’s revenue, expenses, and cash flow. Businesses should consider these external factors when preparing their master budget to ensure accuracy and reliability.

How Often to Update the Master Budget?

A master budget is a living document that should be updated regularly to reflect changes in the business’s financial activities. Depending on the business’s size, complexity, and financial planning cycle, the master budget can be updated monthly, quarterly, or annually.

Monthly updates suit businesses with a complex financial planning cycle, such as those with multiple products, services, or revenue streams. Monthly updates allow businesses to track their financial performance in real-time and make informed decisions based on the available data.

Quarterly updates are suitable for businesses that operate in industries with stable demand and supply, such as manufacturing or distribution. Quarterly updates allow businesses to adjust their budgets based on actual financial performance and changes in the market or competition.

Annual updates are suitable for small businesses with a simple financial planning cycle, such as those with one product or service. Annual updates allow businesses to plan their financial activities for the entire fiscal year and adjust their budget based on actual performance.

Regardless of the frequency of updates, businesses should review and adjust their master budget regularly to accurately reflect their current financial activities and objectives. Businesses should also communicate any changes to the budget to all relevant stakeholders to ensure everyone is on the same page.

What Are the Key Components of a Master Budget?

The key components of a master budget include:

1. Sales Budget 

The sales budget forecasts the number of products or services a company expects to sell over a year and the corresponding revenue generated. It is based on historical data, market trends, and sales forecasts. The sales budget provides a foundation for other budget components and is essential for determining production levels and revenue projections.

2. Production Budget 

The production budget is a plan for the number of new products or services a business aims to manufacture. It is based on the sales forecast and considers the inventory levels, production capacity, and production efficiency. The production budget is essential for managing inventory levels, determining production costs , and achieving sales targets.

3. Manufacturing Budget 

The manufacturing budget includes all the costs involved in manufacturing the number of products specified in the production budget. It covers direct materials , direct labor, and overhead costs. The manufacturing budget is crucial for managing production costs , optimizing production efficiency, and achieving profit margins.

4. Labor and Hiring Budget 

The labor and hiring budget contains employee salaries, benefits, and human resources expenditures. It covers direct and indirect labor costs , including payroll taxes, training, and benefits. The labor and hiring budget is essential for managing human resources costs, ensuring compliance with labor laws, and achieving productivity targets.

5. Cash Budget 

The cash budget is a quarterly record of all money that comes in and goes out of the company, categorized by spending type. It includes cash receipts, cash disbursements, and cash balances. The cash budget is crucial for managing cash flow, optimizing working capital , and avoiding cash shortages.

6. Operating Expenses Budget 

The operating expenses budget encompasses administrative and sales-related costs, such as advertising or marketing. It covers rent, utilities, office supplies, and travel expenses. The operating expenses budget is essential for managing day-to-day expenses, optimizing cost structures, and achieving profitability targets.

7. Overhead Budget 

The overhead budget includes fixed and variable expenses, such as office rent, utilities, and business insurance. It covers indirect expenses that cannot be directly traced to a product or service. The overhead budget is essential for managing indirect expenses, optimizing cost structures , and achieving profit margins.

8. Cost of Goods Sold Budget 

The cost of goods sold budget is a budget for the production costs of goods that a company sells and adds to inventory. It includes direct materials, direct labor, and overhead costs. The cost of goods sold budget is essential for managing production costs, determining pricing strategies, and achieving profit margins.

9. Pro Forma Income Statement 

The pro forma income statement is a company’s forecasted income statement that combines sales revenue with other budget costs. It provides a snapshot of the company’s expected profits or losses. The pro forma income statement is essential for monitoring financial performance, making informed decisions, and achieving financial goals.

How Do You Prepare a Master Budget for Business?

Preparing a master budget for a business involves several steps, including establishing individual budgets, combining these budgets into the master budget, and reviewing and approving the final budget. Here’s a more detailed explanation of each step:

1. Establish Individual Budgets

The first step in creating a master budget is establishing individual budgets for each department or area of the business. The business should create these budgets with input from the relevant stakeholders and reflect each area’s specific needs and goals. 

Common individual budgets include the sales budget, production budget, manufacturing budget, labor and hiring budget, cash budget, operating expenses budget, overhead budget, and cost of goods sold budget.

2. Combine All Separate Budgets Into the Master Budget

Once individual budgets have been created, they must be combined into a single, comprehensive document – the master budget. 

This involves aggregating all of the separate budget items and ensuring that they are aligned with the overall goals and objectives of the business. The master budget should also be reviewed to ensure that all individual budgets are compatible and have no inconsistencies or conflicts.

3. Review and Approve the Master Budget

The final step in preparing a master budget is to review and approve the budget. This involves evaluating the budget against the business’s strategic objectives, financial goals, and performance targets. 

Senior management should also review the budget to ensure it is realistic and achievable. Once the budget has been approved, it should be communicated to all relevant stakeholders and implemented as the basis for financial planning and decision-making throughout the organization.

4. Adjust If Needed

After the master budget has been approved, it is important to monitor actual performance against budgeted performance and make adjustments as necessary. If there are significant deviations from the budget, revising it to reflect the new information may be necessary. 

For example, adjusting the sales budget and related budgets such as production, labor, and overhead may be necessary if sales are lower than expected. Similarly, if costs are higher than expected, it may be necessary to revise the operating and overhead budgets to reflect the increased expenses. 

By monitoring actual performance against the budget and making adjustments as necessary, the business can ensure that the budget remains relevant and useful for financial planning and decision-making.

Example of Master Budget

Here’s an example of how a master budget might be used:

ABC Manufacturing Company is preparing its master budget for the next fiscal year. The company has established individual budgets for each department, including the sales budget, production budget, manufacturing budget, labor and hiring budget, cash budget, operating expenses budget, overhead budget, and cost of goods sold budget. These budgets have been combined into the master budget and reviewed by senior management.

The table below shows a simplified version of ABC Manufacturing Company’s master budget:

Category                                                       Amount

Sales                                                          $5,000,000

Production                                                 $4,000,000

Manufacturing                                           $3,500,000

Labor and Hiring                                       $1,500,000

Cash                                                          $   500,000

Operating Expenses                                   $1,000,000

Overhead                                                   $   750,000

Cost of Goods Sold                                    $2,500,000

Pro Forma Income Statement                      $2,500,000

Once the master budget has been approved, ABC Manufacturing Company will use it as the basis for financial planning and decision-making throughout the organization. For example, the company will use the sales budget to set targets for revenue generation and adjust marketing and sales strategies as necessary to meet these targets. The production and manufacturing budgets will be used to plan production levels and ensure the company has sufficient inventory to meet demand. The labor and hiring budget will manage employee costs and ensure the company has the necessary staffing levels to meet production targets.

The cash budget will monitor the company’s cash flow and ensure it has sufficient cash to meet its obligations. The operating expenses and overhead budgets will be used to manage administrative and sales-related costs and ensure that the company operates efficiently. The cost of goods sold budget will be used to monitor production costs and ensure the company maintains profitability .

Overall, the master budget provides a comprehensive overview of ABC Manufacturing Company’s financial plan for the upcoming year and serves as a roadmap for achieving its financial goals and objectives. By using the master budget as a guide, the company can make informed financial decisions that will help it succeed in a competitive marketplace.

What Are Some Common Challenges Businesses Face When Preparing a Master Budget?

Here are some common challenges businesses may face when preparing a master budget:

1. Lack of Accurate Data 

One of the biggest challenges businesses face when preparing a master budget is a lack of accurate data. Suppose a business does not have access to reliable data. Creating accurate projections for sales, production, and other key areas can be challenging in that case.

2. Inaccurate Sales Projections 

Accurately projecting sales is essential to creating an effective master budget. However, many businesses struggle with this aspect of the budgeting process. Incorrect sales projections can lead to an imbalance in the budget, with the potential for overspending or underproduction.

3. Overlooking Key Expenses 

Another common challenge businesses face when preparing a master budget is overlooking key expenses. This can include unexpected expenses that arise throughout the year or ongoing expenses that may be easy to forget. Overlooking expenses can lead to a budget shortfall and cause financial strain on the business.

4. Unrealistic Expectations 

Setting unrealistic expectations is a common challenge when preparing a master budget. This can happen when a business is overly optimistic about its projected revenue or underestimates its expenses. Unrealistic expectations can lead to a budget deficit, which can be difficult to recover from.

5. Lack of Communication 

A lack of communication between departments can also pose a challenge when preparing a master budget. If different departments have conflicting goals or are not aligned in their projections, it can create a disconnect in the budgeting process.

6. External Factors 

External factors, such as changes in the market or unexpected events, can also pose a challenge when preparing a master budget. These factors can impact sales, production costs, and other key areas, making it difficult to create accurate projections.

7. Lack of Experience 

Preparing a master budget requires certain financial expertise. However, many businesses do not have dedicated financial staff or may not have the experience necessary to create an adequate budget. This can lead to mistakes or oversights in the budgeting process.

Why Is It Important to Review and Adjust the Master Budget Regularly?

Here are some reasons why it is important to review and adjust the master budget regularly:

1. Changing Business Conditions  

Business conditions constantly change, and the master budget must be adjusted to reflect these changes. Changes in the economy, customer demand, or the industry as a whole can all have a significant impact on a business’s financials. By regularly reviewing and adjusting the master budget, businesses can ensure that they are making informed financial decisions aligned with current conditions.

2. Identify Variances 

Regularly reviewing the master budget allows businesses to identify variances or discrepancies between the budgeted amounts and actual results. This can help businesses identify areas where they may be overspending or underspending and make adjustments as necessary. By identifying and addressing variances, businesses can keep their financials on track and avoid potential issues down the line

3. Improve Forecasting Accuracy 

The more data a business has. Its forecasts will be more accurate. By regularly reviewing the master budget, businesses can gather data and insights that can be used to improve forecasting accuracy. This can help businesses make more informed decisions and avoid potential financial pitfalls.

4. Optimize Resource Allocation 

Regularly reviewing and adjusting the master budget can help businesses optimize resource allocation. By identifying areas where they may be overspending or underspending, businesses can reallocate resources to areas that need more support. This can help improve efficiency and maximize the impact of the budget.

5. Ensure Compliance 

Regularly reviewing and adjusting the master budget can help businesses ensure compliance with regulations and internal policies. Changes in regulations or internal policies can impact a business’s financials, and the master budget must be adjusted accordingly. By regularly reviewing the master budget, businesses can ensure they meet all compliance requirements and avoid potential penalties or fines.

How Can a Master Budget Help Businesses Plan for Contingencies and Unforeseen Events?

Here are some ways a master budget can help businesses prepare for unexpected situations:

1. Provides a Clear Financial Picture

A master budget provides a clear picture of the company’s current and projected financial situation. This helps businesses identify potential risks and areas where they can cut costs, allowing them to better understand their financial standing in times of crisis.

2. Allows for Flexible Decision-Making

By regularly reviewing and updating the master budget, businesses can make informed decisions about their operations. They can change their spending and investment plans to remain financially stable, allowing them to react quickly to unforeseen events.

3. Helps Identify Potential Risks

The master budget includes financial projections and risk assessments. This information can help businesses identify potential risks, such as decreased sales, increased production costs, or economic downturns. Identifying these risks can help businesses develop contingency plans to mitigate the impact of these events.

4. Facilitates Cash Management

The cash budget is a crucial component of the master budget. It helps businesses plan their cash flow and ensures they have enough cash to cover their expenses. This is particularly important during times of crisis, when businesses may experience cash flow disruptions.

5. Supports Strategic Planning

A master budget provides a long-term view of the company’s financial position. This allows businesses to make informed strategic decisions about their operations, such as investing in new products or expanding into new markets. With a long-term view, businesses can better assess these decisions’ potential risks and rewards.

How Do Businesses Ensure That Their Master Budget Aligns With Their Strategic Goals?

Aligning the master budget with strategic goals is essential for businesses to achieve long-term objectives. Here are some ways businesses can ensure that their master budget aligns with their strategic goals:

1. Set Clear Goals

The first step in aligning the master budget with strategic goals is to set clear, measurable objectives. These objectives should be specific, achievable, and aligned with the company’s vision and mission . Once the goals are established, the master budget can be developed to support them.

2. Develop a Comprehensive Plan

that outlines the steps required to achieve the strategic goals that should be developed. The plan should include an analysis of the company’s current financial position, a detailed budget that reflects the resources needed to achieve the goals and a timeline for implementation.

3. Involve Key Stakeholders

To ensure that the master budget aligns with strategic goals, it is essential to involve key stakeholders in the budgeting process. This includes senior management, department heads, and key staff members. Their input can provide valuable insights into the resources needed to achieve the strategic goals.

4. Review Regularly

The master budget should be reviewed regularly to align with the company’s strategic goals. This includes monitoring progress toward achieving the goals and making adjustments as necessary to ensure that the budget supports the strategic objectives.

5. Use Metrics to Measure Progress

Metrics should be developed to measure progress toward achieving the strategic goals. These metrics can be used to track progress against the budget, identify areas of success and areas that need improvement, and inform decisions about resource allocation.

6. Consider External Factors

External factors, such as changes in the market, competitor activity, or economic conditions, can impact the company’s ability to achieve its strategic goals. These factors should be considered when developing the master budget, and contingency plans should be developed to mitigate potential risks.

What Are Some Common Mistakes Businesses Make When Creating a Master Budget?

Businesses make several common mistakes when creating their master budgets, leading to inaccurate or unrealistic financial projections. Here are some of the most common mistakes businesses make when creating a master budget and how to avoid them.

1. Overestimating Revenue

One of the most common mistakes businesses make when creating a master budget is overestimating their revenue. This can occur when businesses base their revenue projections on unrealistic assumptions, such as assuming that sales will grow exponentially without considering market conditions or competitors. To avoid this mistake, businesses should base their revenue projections on historical data, market research, and other relevant factors.

2. Underestimating Expenses

Another common mistake businesses make is underestimating their expenses. This can occur when businesses fail to consider all the costs of running their operations, such as marketing, maintenance, and employee salaries. To avoid this mistake, businesses should thoroughly review their expenses and ensure they have included all relevant costs in their budget.

3. Failing to Account for Seasonality

Many businesses fail to account for seasonality when creating their master budget. For example, a retailer might not consider the impact of the holiday season on sales, or a construction company might not consider the impact of inclement weather on project timelines. To avoid this mistake, businesses should consider any seasonality that might impact their revenue or expenses and adjust their projections accordingly.

4. Ignoring Cash Flow

Businesses that fail to account for cash flow when creating their master budget can quickly face financial difficulties. For example, a business might project strong revenue growth. Still, if most of its revenue is tied up in accounts receivable, it may not have enough cash to cover its expenses. To avoid this mistake, businesses should carefully consider their cash flow projections and ensure they have enough cash to cover their expenses.

5. Failing to Communicate with Stakeholders

Creating a master budget is not just about numbers. It also aligns stakeholders’ expectations with the business’s financial goals. Many businesses fail to communicate effectively with stakeholders, such as investors or department heads, when creating their master budget. To avoid this mistake, businesses should involve stakeholders in the budgeting process and ensure they are aware of the assumptions and projections that underpin the budget.

How Can Businesses Leverage Technology and Software Tools to Streamline and Automate the Master Budgeting Process?

Here are some ways businesses can leverage technology and software tools to streamline and automate the master budgeting process:

1. Accounting Software

Accounting software is designed to simplify and automate financial processes, including budgeting. It provides real-time visibility into a company’s financial data, making tracking and analyzing financial performance easier. Businesses can use accounting software to create budgets, track expenses, and generate reports, saving time and increasing accuracy.

2. Budgeting Software

Various budgeting software is available to help businesses streamline and automate the budgeting process . These software tools allow businesses to create and manage budgets, track expenses, and generate reports. Budgeting software can help businesses identify areas to reduce costs and increase profitability .

3. Cloud-based Tools

Cloud-based tools provide businesses the flexibility and convenience of accessing their financial data anytime. Cloud-based software can be accessed via the Internet, making it easier for businesses to collaborate and share financial data. These tools also provide real-time updates, reducing the risk of errors and ensuring accuracy.

4. Data Analytics Tools

Data analytics tools can help businesses analyze financial data to identify trends, patterns, and anomalies. This information can be used to create more accurate and realistic budgets. Data analytics tools can help businesses forecast future financial performance and identify potential risks and opportunities.

5. Artificial Intelligence (AI)

AI technology can be used to automate and streamline the budgeting process. For instance, businesses can use AI-powered chatbots to answer budget questions, track expenses, and generate reports. AI can also help businesses identify trends and patterns in financial data, making it easier to create more accurate budgets.

What Are the Ethical Considerations Businesses Should Keep in Mind When Preparing Their Master Budget?

Ethical considerations ensure that businesses act in an ethical and socially responsible manner. Here are some ethical considerations businesses should consider when preparing their master budget:

1. Transparency

Businesses must ensure transparency in the budgeting process , providing accurate and complete information to stakeholders. Transparency helps build trust and credibility with stakeholders, including shareholders, investors, and employees.

2. Fairness

Businesses should ensure that the budgeting process is fair to all stakeholders. This includes treating employees and suppliers fairly and not exploiting them. Fairness ensures that all stakeholders benefit from the budgeting process.

3. Accuracy

The budgeting process should be accurate and based on realistic assumptions. It should not be based on misleading or false information. Accuracy ensures that stakeholders can make informed decisions based on reliable data.

4. Sustainability

Businesses must consider the long-term sustainability of their financial objectives. This means considering the impact of their financial decisions on the environment, society, and the economy. Sustainability ensures that businesses act socially responsibly and contribute to the common good.

5. Responsibility

Businesses should take responsibility for their financial decisions. This includes acknowledging and rectifying any mistakes or errors in the budgeting process. Responsibility ensures that businesses act with integrity and accountability.

6. Confidentiality

Businesses should maintain the confidentiality of financial data. This includes protecting sensitive financial information from unauthorized access or disclosure. Confidentiality ensures that businesses protect stakeholders’ privacy and maintain their trust.

7. Stakeholder Engagement

Businesses should engage stakeholders in the budgeting process . This includes listening to their input and feedback and considering their perspectives. Stakeholder engagement ensures that businesses are responsive to stakeholder needs and concerns.

8. Compliance

Businesses must comply with relevant laws and regulations. This includes tax laws, financial reporting requirements, and ethical standards. Compliance ensures that businesses act within legal and ethical boundaries.

Master Budget Explained: Component, Examples, and How to Prepare – Conclusion

In conclusion, a master budget is a crucial tool businesses use to manage their finances effectively. It enables them to plan and allocate resources, make informed decisions, and achieve financial objectives. A well-prepared master budget is accurate and aligns with the business’s strategic goals and values.

However, creating a master budget can be challenging, and businesses must consider ethical considerations, engage stakeholders, and leverage technology to streamline and automate the process . By doing so, businesses can create a master budget that benefits all stakeholders and contributes to the common good.

Regularly reviewing and adjusting the master budget ensures businesses can adapt to changing circumstances and plan for contingencies and unforeseen events. Ultimately, the master budgeting process requires a collaborative effort from all organization members to ensure its success.

With the right skills, knowledge, and tools, businesses can create a master budget that helps them achieve long-term financial success and sustainably contribute to society.

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How To Write A Business Plan (2024 Guide)

Updated: Apr 17, 2024, 11:59am

Table of Contents

Brainstorm an executive summary, create a company description, brainstorm your business goals, describe your services or products, conduct market research, create financial plans, bottom line, frequently asked questions.

Every business starts with a vision, which is distilled and communicated through a business plan. In addition to your high-level hopes and dreams, a strong business plan outlines short-term and long-term goals, budget and whatever else you might need to get started. In this guide, we’ll walk you through how to write a business plan that you can stick to and help guide your operations as you get started.

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Drafting the Summary

An executive summary is an extremely important first step in your business. You have to be able to put the basic facts of your business in an elevator pitch-style sentence to grab investors’ attention and keep their interest. This should communicate your business’s name, what the products or services you’re selling are and what marketplace you’re entering.

Ask for Help

When drafting the executive summary, you should have a few different options. Enlist a few thought partners to review your executive summary possibilities to determine which one is best.

After you have the executive summary in place, you can work on the company description, which contains more specific information. In the description, you’ll need to include your business’s registered name , your business address and any key employees involved in the business. 

The business description should also include the structure of your business, such as sole proprietorship , limited liability company (LLC) , partnership or corporation. This is the time to specify how much of an ownership stake everyone has in the company. Finally, include a section that outlines the history of the company and how it has evolved over time.

Wherever you are on the business journey, you return to your goals and assess where you are in meeting your in-progress targets and setting new goals to work toward.

Numbers-based Goals

Goals can cover a variety of sections of your business. Financial and profit goals are a given for when you’re establishing your business, but there are other goals to take into account as well with regard to brand awareness and growth. For example, you might want to hit a certain number of followers across social channels or raise your engagement rates.

Another goal could be to attract new investors or find grants if you’re a nonprofit business. If you’re looking to grow, you’ll want to set revenue targets to make that happen as well.

Intangible Goals

Goals unrelated to traceable numbers are important as well. These can include seeing your business’s advertisement reach the general public or receiving a terrific client review. These goals are important for the direction you take your business and the direction you want it to go in the future.

The business plan should have a section that explains the services or products that you’re offering. This is the part where you can also describe how they fit in the current market or are providing something necessary or entirely new. If you have any patents or trademarks, this is where you can include those too.

If you have any visual aids, they should be included here as well. This would also be a good place to include pricing strategy and explain your materials.

This is the part of the business plan where you can explain your expertise and different approach in greater depth. Show how what you’re offering is vital to the market and fills an important gap.

You can also situate your business in your industry and compare it to other ones and how you have a competitive advantage in the marketplace.

Other than financial goals, you want to have a budget and set your planned weekly, monthly and annual spending. There are several different costs to consider, such as operational costs.

Business Operations Costs

Rent for your business is the first big cost to factor into your budget. If your business is remote, the cost that replaces rent will be the software that maintains your virtual operations.

Marketing and sales costs should be next on your list. Devoting money to making sure people know about your business is as important as making sure it functions.

Other Costs

Although you can’t anticipate disasters, there are likely to be unanticipated costs that come up at some point in your business’s existence. It’s important to factor these possible costs into your financial plans so you’re not caught totally unaware.

Business plans are important for businesses of all sizes so that you can define where your business is and where you want it to go. Growing your business requires a vision, and giving yourself a roadmap in the form of a business plan will set you up for success.

How do I write a simple business plan?

When you’re working on a business plan, make sure you have as much information as possible so that you can simplify it to the most relevant information. A simple business plan still needs all of the parts included in this article, but you can be very clear and direct.

What are some common mistakes in a business plan?

The most common mistakes in a business plan are common writing issues like grammar errors or misspellings. It’s important to be clear in your sentence structure and proofread your business plan before sending it to any investors or partners.

What basic items should be included in a business plan?

When writing out a business plan, you want to make sure that you cover everything related to your concept for the business,  an analysis of the industry―including potential customers and an overview of the market for your goods or services―how you plan to execute your vision for the business, how you plan to grow the business if it becomes successful and all financial data around the business, including current cash on hand, potential investors and budget plans for the next few years.

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How to Create a Master Budget

Updated: March 11, 2024

Published: December 02, 2022

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?

Are we spending in the right places?

Are we achieving our desired outcomes?

Have our priorities changed?

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

Source: AccountingTools

General Admin Budget

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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What Is a Master Budget? Definition, Purposes, Usages, and More

A master budget is a comprehensive financial plan that outlines a company’s projected income and expenses for a specific period, usually a year.

It is an essential tool for businesses to manage their finances effectively, make informed decisions, and achieve their long-term goals.

Definition:

A master budget is a detailed financial plan that includes projections of sales, expenses, and profits for a specific period. It is typically prepared annually and serves as a blueprint for a company’s financial operations.

The master budget has several uses, including:

• Strategic planning:  The master budget helps companies to plan their financial strategies and set targets for the upcoming year.
• Resource allocation:  The master budget helps companies to allocate their resources, including workforce, raw materials, and capital, effectively.
• Performance evaluation:  The master budget provides a benchmark against which a company can evaluate its actual performance.
• Coordination:  A master budget is a tool that ensures that all departments and functions are aligned in achieving the company’s financial objectives.
• Planning: The master budget is a comprehensive plan outlining the company’s financial goals and objectives for the year. It provides a roadmap for managers to follow and guides resource allocation and budgeting decision-making.
• Coordination: The master budget combines different functional areas of the company, such as sales, marketing, operations, and finance, and ensures that they are all working towards the same financial objectives.
• Control: The master budget provides a benchmark against which actual performance can be measured. By monitoring performance against the budget, managers can identify areas where the company is falling behind and take corrective action to get back on track.
• Resource allocation: The master budget helps managers allocate resources effectively by identifying the company’s priorities and allocating resources accordingly. This ensures that the company invests in the areas most likely to drive growth and profitability.
• Performance evaluation: The master budget provides a basis for evaluating the performance of different departments, teams, or individuals within the company. By comparing actual performance against the budget, managers can identify areas of strength and weakness and take appropriate action.
• Communication: A master budget is a key tool for communicating the company’s financial goals and objectives to investors, lenders, and employees. It provides transparency and accountability around the company’s financial performance.
• Motivation: The master budget can motivate employees to achieve their performance targets. By setting clear goals and targets, employees are more likely to feel a sense of ownership and accountability for their work.
• Risk management: The master budget can help identify potential risks and challenges impacting the company’s financial performance. By planning for contingencies and developing strategies to mitigate risk, managers can ensure that the company is better prepared to handle unforeseen events.
• Capital budgeting: The master budget can guide decisions around capital expenditures such as property, plant, and equipment investments. By aligning capital spending with the company’s financial objectives, managers can ensure that the company is investing in projects that will generate a positive return.
• Strategic planning: The master budget is a key input into the company’s strategic planning process. By setting financial targets and objectives, the master budget helps to guide the development of the company’s overall strategy and ensures that financial considerations are considered in strategic decision-making.

The primary objective of a master budget is to provide a comprehensive financial plan that guides the company’s financial operations throughout the year.

The master budget serves as a roadmap that outlines the company’s financial goals and objectives, and it provides a framework for managers to allocate resources, set performance targets, and monitor progress.

By setting clear financial targets and objectives, the master budget helps managers to focus on what is most important for the company’s long-term success. It provides a basis for decision-making around budgeting, resource allocation, and capital expenditures.

The master budget also enables managers to identify potential risks and challenges that may impact the company’s financial performance and to develop strategies to mitigate those risks.

A master budget is a key tool for controlling costs and optimizing the company’s financial performance.

By monitoring actual performance against the budget, managers can identify variances and take corrective action to address any deviations from the plan. They can also identify opportunities to improve efficiency, reduce costs, and increase profitability.

A company that produces and sells widgets may prepare a master budget that includes projections for sales, cost of goods sold, operating expenses, capital expenditures, and financing activities for the upcoming year.

The sales projections may be based on historical trends, market research, and sales forecasts. The cost of goods sold projections may include estimates for raw materials, labor, and overhead costs.

The operating expenses projections may include estimates for rent, utilities, salaries, and advertising costs. The capital expenditure projections may include equipment, technology, and infrastructure investment estimates.

The financing activities projections may include estimates for debt financing and equity financing. The master budget guides the company’s financial operations throughout the year, enabling management to monitor performance against the plan and take corrective action if necessary.

What Should be Included in a Master Budget?

A master budget typically includes the following components:

• Sales budget:  This includes projections for sales volume and revenue.
• Production budget:  This includes projections for production volume and the resources required to produce the goods or services.
• Operating expenses budget:  This includes projections for all operating expenses, including salaries, rent, utilities, and marketing expenses.
• Capital expenditures budget:  This includes projections for all capital expenditures, including investments in equipment, technology, and infrastructure.
• Cash budget:  This includes projections for cash inflows and outflows, including cash receipts from customers, cash payments to suppliers, and debt financing.
• The budgeted income statement  summarizes the company’s projected revenue, expenses, and profits for the period.
• Budgeted balance sheet:  This summarizes the company’s projected assets, liabilities, and equity at the end of the period.

How Does a Master Budget Work?

A master budget provides a planning, decision-making, and performance-monitoring framework. It enables a company to allocate its resources effectively, monitor its progress against the plan, and make adjustments as necessary to achieve its financial objectives.

The master budget is typically prepared annually, but it may be updated more frequently to reflect market conditions or business strategy changes.

Once the master budget is prepared, it guides the company’s financial operations throughout the year. Managers use the budget to plan and allocate resources, set performance targets, and monitor progress.

They compare actual results against the budget and identify variances or differences. They then take corrective action to address any variances and ensure that the company stays on track to achieve its financial objectives.

For example, if the company’s sales are lower than projected, managers may review their marketing strategy or adjust their pricing to increase demand.

If the company’s actual expenses exceed projected, managers may look for ways to reduce costs, such as negotiating better prices with suppliers or optimizing their production processes.

By monitoring their performance against the master budget, managers can identify opportunities to improve efficiency, reduce costs, and increase profitability.

In conclusion, a master budget is crucial for companies to manage their finances effectively, make informed decisions, and achieve their long-term goals.

It provides a comprehensive financial plan that guides the company’s financial operations throughout the year, enabling managers to monitor performance against the plan and take corrective action as necessary. By preparing and using a master budget, companies can allocate resources effectively, control costs, and achieve profitability.

What Are the Limitations of Master Budget?

While a master budget can be a valuable tool for planning and controlling a company’s financial operations, it also has limitations. Here are some of the limitations of a master budget:

• Limited flexibility: A master budget is typically developed at the beginning of a fiscal year and covers a fixed period. This can limit the company’s ability to respond to changes in the business environment or unexpected events that may occur throughout the year.
• Time-consuming: Developing a master budget can be time-consuming, particularly for large and complex organizations. It requires input and collaboration from various stakeholders across different functional areas and may take several weeks or months to finalize.
• Inaccurate assumptions: A master budget relies on some assumptions, such as sales forecasts, cost estimates, and production schedules. If these assumptions are inaccurate, the budget may not reflect the actual financial performance of the company.
• Lack of alignment with strategy: A master budget may not always be aligned with the company’s overall strategic objectives. This can result in a mismatch between the budget and the company’s long-term goals, leading to suboptimal financial performance.
• Unrealistic targets: A master budget may set unrealistic financial targets, leading to employee frustration and demotivation. This can also lead to a lack of buy-in from stakeholders and a lack of accountability for achieving the budget.
• Inflexibility in changing conditions: Due to its rigidity and pre-defined nature, a master budget may not be able to respond to sudden or drastic changes in business conditions. It can become obsolete and irrelevant in a rapidly changing environment.
• Dependency on historical data: The master budget is typically based on historical data and trends, which may not necessarily reflect future market conditions or changes in consumer behavior.

Overall, a master budget is a valuable tool for managing a company’s finances, but it should be used with other management tools and approaches to ensure that the company remains agile and responsive to changes in the business environment.

What Are the Advantages of Master Budget?

A master budget has several advantages for businesses. Here are some of the key advantages:

• Provides a framework for decision-making: The master budget helps to guide decision-making by providing a comprehensive overview of the company’s financial position and goals. This enables managers to make informed decisions about resource allocation, investment, and cost management.
• Facilitates communication and coordination: A master budget is a communication tool that enables different functional areas within the company to coordinate their efforts and work towards common financial goals. This helps to ensure that everyone is working towards the same objectives and reduces the risk of conflicting priorities.
• Enhances financial control: The master budget provides a structure for monitoring and controlling financial performance. By setting targets and benchmarks, managers can identify variances and take corrective action to ensure the company is on track to meet its financial objectives.
• Improves forecasting and planning: The master budget requires managers to make assumptions and projections about future financial performance. This helps to improve forecasting and planning capabilities, enabling the company to anticipate and prepare for future challenges and opportunities.
• Supports performance evaluation: The master budget provides a basis for evaluating the performance of different functional areas and departments within the company. By comparing actual performance against budgeted performance, managers can identify areas for improvement and implement corrective action where necessary.
• Enables resource optimization: The master budget helps to ensure that resources are allocated efficiently and effectively to support the company’s financial objectives. This can reduce waste and optimize the use of available resources.

A master budget is valuable for managing a company’s finances and achieving its long-term financial goals.

Providing a structured approach to financial planning and control enables managers to make informed decisions, coordinate their efforts, and optimize the use of resources.

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Master budget: Master Budget Explained: Component, Examples, and How to Prepare

Home » Bookkeeping » Master budget: Master Budget Explained: Component, Examples, and How to Prepare

If there are significant deviations from the budget, revising it to reflect the new information may be necessary. The management group at Jerry’s Ice Cream is reconvening to discuss sales growth anticipated for the next budget period. The company expects to collect 70 percent of sales in the quarter of sale, 25 percent of sales in the quarter following the sale, and 5 percent will not be collected (bad debt). Accounts receivable at the end of last year totaled $200,000, all of which will be collected in the first quarter of this coming year. Figure 9.11 “Cash Budget for Jerry’s Ice Cream” shows the cash budget for Jerry’s Ice Cream. Amounts shown in parentheses represent cash outflows; amounts without parentheses represent cash inflows.

They can take necessary steps to manage their cash flow, such as delaying payments or arranging short-term financing. Spreadsheets help managers perform what-if analysis by linking the components of the master budget and automatically making changes to budget schedules when certain estimates are revised. For short-term planning, you can simply multiply the number of units to be sold from each product times their price. Keep in mind that both quantity and price estimates for the future depend on the company’s strategy and objectives. However, many businesses do not have dedicated financial staff or may not have the experience necessary to create an adequate budget. A lack of communication between departments can also pose a challenge when preparing a master budget.

Master Budget vs. Flexible Budget

The cost of goods sold budget will be used to monitor production costs and ensure the company maintains profitability. The manufacturing budget includes all the costs involved in manufacturing the number of products specified in the production budget. The manufacturing budget is crucial for managing production costs, optimizing production efficiency, and achieving profit margins. The best time to prepare a master budget depends on the business’s fiscal year and financial planning cycle. Most businesses prepare their budgets annually, while others do it quarterly or bi-annually. Ideally, businesses should start preparing their master budget at least three months before the start of the fiscal year.

A master budget is a comprehensive financial plan that integrates all lower-level budgets and provides an overview of a business’s financial activities for one year, usually one year. The master budget includes budgets for revenue, expenses, capital expenditures, and cash flow. It serves as a roadmap for the business’s financial activities and guides the decision-making process of managers and executives. An example of how to use Excel to develop an operating budget for Jerry’s Ice Cream follows. The first tab is for the sales budget worksheet, the second tab is for the production budget worksheet, the next tab is for the direct materials purchases budget worksheet, and so on.

Smaller organizations usually construct their master budgets using electronic spreadsheets. However, spreadsheets may contain formula errors, and also have a difficult time constructing a budgeted balance sheet. Larger organizations use budget-specific software, which does not have these two problems. A master budget is the central planning tool that a management team uses to direct the activities of a corporation, as well as to judge the performance of its various responsibility centers.

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. “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. This chapter cannot cover all areas of budgeting in detail—entire books have been written on budgeting.

• The F&O Business Office then uploaded this information to formulate the division’s budget.
• It considers the expected product demand, production capacity, and inventory levels.
• Prior to 2000, activity managers were required to use Excel to process budget information.
• This budget assigns a value to every unit of product produced based on raw materials, direct labor, and overhead.

First, it provides a holistic view of the organization’s financial activities, enabling managers and executives to make informed decisions based on the available financial resources. Second, it helps businesses align their financial goals with their strategic objectives. By preparing a master budget, businesses can determine their financial priorities and allocate resources accordingly. The bottom section of the cash budget is where the ending cash balance is calculated for each budget period.

Direct Labor Budget

Still, if most of its revenue is tied up in accounts receivable, it may not have enough cash to cover its expenses. To avoid this mistake, businesses should carefully consider their cash flow projections and ensure they have enough cash to cover their expenses. Fifth, they need strong organizational skills to manage the budgeting process effectively.

• ABC Manufacturing Company is preparing its master budget for the next fiscal year.
• Changes in regulations or internal policies can impact a business’s financials, and the master budget must be adjusted accordingly.
• Any item that is not in cash, such as depreciation, is ignored by the cash budget.
• Quarterly updates allow businesses to adjust their budgets based on actual financial performance and changes in the market or competition.
• An example of how to use Excel to develop an operating budget for Jerry’s Ice Cream follows.
• Unit sales are expected to increase 25 percent, and each unit is expected to sell for $8.

The master budget is typically presented in either a monthly or quarterly format, and usually covers a company’s entire fiscal year. There may also be a discussion of the headcount changes that are required to achieve the budget. The pro forma income statement is a company’s forecasted income statement that combines sales revenue with other budget costs.

Cash Collections from Sales

Cloud-based tools provide businesses the flexibility and convenience of accessing their financial data anytime. Cloud-based software can be accessed via the internet, making it easier for businesses to collaborate and share financial data. These tools also provide real-time updates, reducing the risk of errors and ensuring accuracy. That outlines the steps required to achieve the strategic goals that should be developed.

Supports Strategic Planning

Depending on the business’s size, complexity, and financial planning cycle, the master budget can be updated monthly, quarterly, or annually. Creating a master budget is a complex process requiring a skilled professional team. Another benefit of a master budget is that it helps businesses manage their cash flow effectively. By projecting their cash inflows and outflows, businesses can determine when they may experience cash shortages or surpluses.

What Are the Ethical Considerations Businesses Should Keep in Mind When Preparing Their Master Budget?

If different departments have conflicting goals or are not aligned in their projections, it can create a disconnect in the budgeting process. By using the master budget as a guide, the company can make informed financial decisions that will help it succeed in a competitive marketplace. The operating expenses budget encompasses administrative and sales-related costs, such as advertising or marketing. The operating expenses budget is essential for managing day-to-day expenses, optimizing cost structures, and achieving profitability targets.

It shows the total amount that a company plans to generate by selling (or acquiring) fixed assets such as machinery, plants, or cars. Retained earnings at the end of last year totaled $56,180, and no cash dividends are anticipated for the budget period ending December 31. Here are a couple examples of budgets you’d find inside a master budget (all numbers are hypothetical). It should be reviewed, assessed, and updated on (at least) a quarterly basis to see how things are going. 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. Budgets allow business leaders to have informed conversations about the company’s expenses.

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7.4: Master Budgets

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A master budget consists of a projected income statement (planned operating budget) and a projected balance sheet (financial budget) showing the organization’s objectives and proposed ways of attaining them. In diagram below, we depict a flowchart of the financial planning process that you can use as an overview of the elements in a master budget. The remainder of this chapter describes how a company prepares a master budget. We emphasize the master budget because of its prime importance to financial planning and control in a business entity.

The budgeting process starts with management’s plans and objectives for the next period. These plans take into consideration various policy decisions concerning selling price, distribution network, advertising expenditures, and environmental influences from which the company forecasts its sales for the period (in units by product or product line). Managers arrive at the sales budget in dollars by multiplying sales units times sales price per unit. They use expected production, sales volume, and inventory policy to project cost of goods sold. Next, managers project operating expenses such as selling and administrative expenses.

This chapter cannot cover all areas of budgeting in detail—entire books have been written on budgeting. However, the following video provides an overview of a budgeting procedure that many successful companies have used.

A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llmanagerialaccounting/?p=154

We begin the budget process by discussing the planned operating budget or projected income statement.

The projected balance sheet, or financial budget, depends on many items in the projected income statement. Thus, the logical starting point in preparing a master budget is the projected income statement, or planned operating budget. However, since the planned operating budget shows the net effect of many interrelated activities, management must prepare several supporting budgets (sales, production, and purchases, to name a few) before preparing the planned operating budget. The process begins with the sales budget.

• Accounting Principles: A Business Perspective. Authored by : James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. Provided by : Endeavour International Corporation. Project : The Global Text Project. License : CC BY: Attribution
• The Master Budget (Managerial Accounting Tutorial #38) . Authored by : Note Pirate. Located at : youtu.be/n0iddr99fD4. License : All Rights Reserved . License Terms : Standard YouTube License

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Why Business Budget Planning Is So Important

What is a business budget, business budget planning steps, benefits of business budget planning.

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Successful small businesses depend on the effectiveness of a business owner's planning process. One of the most critical elements of the planning process is business budget planning, which is also one of the final stages of the planning process. To begin, you have to gather company financial data, forecasts, and industry analysis to help you build your business budget.

Along with the valuable financial information and analytics, however, you also need to keep the company's general business and strategic plans in mind in order to build your budget.

A business budget is a dynamic, financial plan used to estimate a company's anticipated revenue and expenses for an upcoming time period. It is essentially a financial plan a business makes for a month, quarter, or year. It should be dynamic and flexible so it can be adjusted as business plans and the market environment change.

Business budgets should include every source of revenue, or income, anticipated by a firm along with all possible expenditures the firm might make during a specified time period.

A detailed and realistic budget is one of the most important tools for guiding your business. A budget provides essential information for operating within your means, managing unexpected challenges, and turning a profit. A proper budget will identify available capital, estimate expenditures, and anticipate revenues. Business owners must continually refer to their budget as a way of measuring forecasted budget figures against actual budgetary results in order to know where to make adjustments.

Planning should account for long-term needs as well. For example, if you anticipate a large expenditure one or two years down the road for computer upgrades or equipment maintenance, it's a good idea to start budgeting in advance.

A budget is a foundational  framework for your business finances, detailing past performance and providing a tool for forecasting the fiscal year, or another time period, with a view of assets, revenue, and expenses. Here is an overview of the budgetary process:

Budget Preparation

Budgets enable a business to accurately set goals, priorities, and spending caps, and detail where funding originates and where new strategies might bring revenue into the company coffers. The line items that command the most funding are high-priority items like the sources of revenue and the different types of expenses. These items demand precise bookkeeping and serve as performance indicators of the overall business strategy.

An effective budget should break down revenue and anticipated expenses by month, by quarter, or fiscal year. Depending on the size of your business, it should include separate budgets for each department. These departmental budgets should also be broken down by month or by quarter, and collectively, they will come together to form your  master budget .

The master budget is a comprehensive financial plan based on the strategic plan of the business firm. It is composed of two sub-budgets—the operating budget and the financial budget . Each of these includes a number of more specific budgets.

Businesses that rely heavily on seasonal sales revenue serve as a good example of why a budget is so important. If the months of June, July, August, and December typically generate 75% of your business's revenue, your budget will allow you to plan ahead. Having a strategy for distributing your revenue most effectively over the course of a full fiscal year will help maximize profits.

Budget to Evaluate Company Performance

In addition to being an important part of the planning process, budgets are necessary for evaluating the performance of your company over the course of each fiscal year. Common types of budgeting in business are:

• Static budgets : Static budgets are a type of operating budget that uses historical financial data to budget for revenue and expenses expected in the next time period. Typically used by very small businesses, these budgets require taking each line item and adding a percentage increase or decrease to it to reflect the next budget.
• Performance-based budgeting : This type of budget takes into account the inputs and outputs per unit of product or service in order to achieve maximum efficiency.
• Zero-based budgeting : A zero-based budget starts from scratch every time period and builds a new budget based on the conditions at that time. In other words, it starts from zero for each line item and uses internal and industry financial data to build the budget.
• Variance analysis : A variance-based budget is one where actual and expected values for every revenue and expense item are calculated. The results are used to try to bring the budget items back within a certain range and achieve improved efficiency

The use of one of these types of company budgets can be another tool for the financial analysis of the firm.

For example, if sales in the first quarter are lower than what you budgeted, you'll know to find expenses to cut later in the fiscal year in order to stay profitable. A more positive example might be sales of a new product that exceeds expectations. By tracking this trend and comparing it to what was budgeted, you will see that you have the additional revenue to perhaps revise the budget with plans to increase production or hire additional staff to handle the extra business.

Budget to Obtain Financing

A history of writing sound, detailed budgets and sticking to them can help show lenders or potential investors that you can develop a business plan and make it work.

Lenders and investors want to dig deeply into your finances and history. If they don't see evidence of strong budgeting practices, it might be a red flag that would turn them away.

If you're opening a new business and have little or no history, you need to make up for that lack of a track record with detailed support for your budget. This means doing research on the marketplace and showing how past trends or, perhaps a void in the industry, supports the numbers you present. This kind of attention to detail can help you gain serious consideration from lenders or investors.

Staffing for Budgeting

Even small businesses with only a few employees need to make sure they're staffed properly for writing and maintaining a budget. If, for example, you own and operate a small cafe, you might have a unique menu and a reputation for quality customer service, but that doesn't mean you're a financial professional.

If hiring a full-time person to handle your budget and other financial affairs is not realistic, consider part-time help or working with an outside consulting firm, especially early on and annually when it comes time to write a new budget for the next fiscal year. SCORE , a business mentorship organization affiliated with the U.S. Small Business Administration (SBA), is made up largely of volunteers with backgrounds in business and finance who provide guidance and advice to small businesses. This can be a valuable resource when you're just getting started or when you're confronted with a significant challenge. In addition to helping with budgeting or other problems, organizations like SCORE can put you in touch with other resources in your community.

Budgeting Software

Some of the best tools for writing a detailed budget and sticking to it are software programs, and they go beyond just Microsoft Excel or other spreadsheet programs. Some of the most useful budget software programs are:

• QuickBooks : One of the most user-friendly and inexpensive software programs that include budgeting.
• Budgyt : A user-friendly budget software program allowing for more than one profit and loss statement.
• PlanningMaestro by Centage : A cloud-based budgeting software program, including forecasting, for small and medium-sized businesses.

In addition, you already might be utilizing PayPal, Square, or other similar online services with your point-of-sale (POS) system . And like the software programs above, they offer tools for writing a budget and tracking revenue and expenses.

When looking for a budgeting software program, you usually want to look for these features:

• Departmentalized budgeting : Gives you the ability to create budgets by department, division, or profit center and merge them all into the master budget.
• Collaboration : Gives more than one person in your organization the ability to work on the budgetary planning process.
• Variance comparison : Gives you the ability to see actual vs. budgeted amounts on a line-by-line basis.

If a business does not develop a budget, it will face a host of problems. It is, effectively, flying blind if it is not aware how much revenue to expect or expenses to plan to during a given time period. Such a business will likely fail within the first two years after it opens.

The benefits of business budget planning are many. Here are some of the most important:

• Financial health : Without a business budget, it is impossible for you to know the financial health of your company. You will have no idea if you met or exceeded your goals.
• Strategic planning : A business budget allows you to develop a strategic plan since you will know the answer to issues like whether you can expand.
• Obtain debt financing : If a small business tries to obtain debt financing from a bank or other financial institution, it must produce a budget to show potential lenders.
• Attract investors : If a business wants to attract investors in the business, those investors will not put their money into the business unless they can see a budget.
• Tax preparation : A business budget assists in the preparation of income, sales, and payroll taxes.
• Decision making : In order to make decisions about any facet of the business, you have to know how much money is allocated to that item.

Corporate Finance Institute. " Types of Budgets ." Accessed March 9, 2021.

eFinance Management. " Variance Analysis ." Accessed March 9, 2021.

CompareCamp. " Best Budgeting Software - 2021 List of Top 10 Budgeting Software Tools ." Accessed March 9, 2021.

Business and Finance Experts Column. " The Benefits of Budgeting in a Business ." Accessed March 9, 2021.

How to Write a Business Plan: Step-by-Step Guide + Examples

Noah Parsons

24 min. read

Updated May 7, 2024

Writing a business plan doesn’t have to be complicated. 

In this step-by-step guide, you’ll learn how to write a business plan that’s detailed enough to impress bankers and potential investors, while giving you the tools to start, run, and grow a successful business.

• The basics of business planning

If you’re reading this guide, then you already know why you need a business plan . 

You understand that planning helps you: 

• Raise money
• Grow strategically
• Keep your business on the right track 

As you start to write your plan, it’s useful to zoom out and remember what a business plan is .

At its core, a business plan is an overview of the products and services you sell, and the customers that you sell to. It explains your business strategy: how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

Most business plans also include financial forecasts for the future. These set sales goals, budget for expenses, and predict profits and cash flow. 

A good business plan is much more than just a document that you write once and forget about. It’s also a guide that helps you outline and achieve your goals. 

After completing your plan, you can use it as a management tool to track your progress toward your goals. Updating and adjusting your forecasts and budgets as you go is one of the most important steps you can take to run a healthier, smarter business. 

We’ll dive into how to use your plan later in this article.

There are many different types of plans , but we’ll go over the most common type here, which includes everything you need for an investor-ready plan. However, if you’re just starting out and are looking for something simpler—I recommend starting with a one-page business plan . It’s faster and easier to create. 

It’s also the perfect place to start if you’re just figuring out your idea, or need a simple strategic plan to use inside your business.

Dig deeper : How to write a one-page business plan

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• What to include in your business plan

Executive summary

The executive summary is an overview of your business and your plans. It comes first in your plan and is ideally just one to two pages. Most people write it last because it’s a summary of the complete business plan.

Ideally, the executive summary can act as a stand-alone document that covers the highlights of your detailed plan. 

In fact, it’s common for investors to ask only for the executive summary when evaluating your business. If they like what they see in the executive summary, they’ll often follow up with a request for a complete plan, a pitch presentation , or more in-depth financial forecasts .

Your executive summary should include:

• A summary of the problem you are solving
• A description of your product or service
• An overview of your target market
• A brief description of your team
• A summary of your financials
• Your funding requirements (if you are raising money)

Dig Deeper: How to write an effective executive summary

Products and services description

This is where you describe exactly what you’re selling, and how it solves a problem for your target market. The best way to organize this part of your plan is to start by describing the problem that exists for your customers. After that, you can describe how you plan to solve that problem with your product or service. 

This is usually called a problem and solution statement .

To truly showcase the value of your products and services, you need to craft a compelling narrative around your offerings. How will your product or service transform your customers’ lives or jobs? A strong narrative will draw in your readers.

This is also the part of the business plan to discuss any competitive advantages you may have, like specific intellectual property or patents that protect your product. If you have any initial sales, contracts, or other evidence that your product or service is likely to sell, include that information as well. It will show that your idea has traction , which can help convince readers that your plan has a high chance of success.

Market analysis

Your target market is a description of the type of people that you plan to sell to. You might even have multiple target markets, depending on your business. 

A market analysis is the part of your plan where you bring together all of the information you know about your target market. Basically, it’s a thorough description of who your customers are and why they need what you’re selling. You’ll also include information about the growth of your market and your industry .

Try to be as specific as possible when you describe your market. 

Include information such as age, income level, and location—these are what’s called “demographics.” If you can, also describe your market’s interests and habits as they relate to your business—these are “psychographics.” 

Related: Target market examples

Essentially, you want to include any knowledge you have about your customers that is relevant to how your product or service is right for them. With a solid target market, it will be easier to create a sales and marketing plan that will reach your customers. That’s because you know who they are, what they like to do, and the best ways to reach them.

Next, provide any additional information you have about your market. 

What is the size of your market ? Is the market growing or shrinking? Ideally, you’ll want to demonstrate that your market is growing over time, and also explain how your business is positioned to take advantage of any expected changes in your industry.

Dig Deeper: Learn how to write a market analysis

Competitive analysis

Part of defining your business opportunity is determining what your competitive advantage is. To do this effectively, you need to know as much about your competitors as your target customers. 

Every business has some form of competition. If you don’t think you have competitors, then explore what alternatives there are in the market for your product or service. 

For example: In the early years of cars, their main competition was horses. For social media, the early competition was reading books, watching TV, and talking on the phone.

A good competitive analysis fully lays out the competitive landscape and then explains how your business is different. Maybe your products are better made, or cheaper, or your customer service is superior. Maybe your competitive advantage is your location – a wide variety of factors can ultimately give you an advantage.

Dig Deeper: How to write a competitive analysis for your business plan

Marketing and sales plan

The marketing and sales plan covers how you will position your product or service in the market, the marketing channels and messaging you will use, and your sales tactics. 

The best place to start with a marketing plan is with a positioning statement . 

This explains how your business fits into the overall market, and how you will explain the advantages of your product or service to customers. You’ll use the information from your competitive analysis to help you with your positioning. 

For example: You might position your company as the premium, most expensive but the highest quality option in the market. Or your positioning might focus on being locally owned and that shoppers support the local economy by buying your products.

Once you understand your positioning, you’ll bring this together with the information about your target market to create your marketing strategy . 

This is how you plan to communicate your message to potential customers. Depending on who your customers are and how they purchase products like yours, you might use many different strategies, from social media advertising to creating a podcast. Your marketing plan is all about how your customers discover who you are and why they should consider your products and services. 

While your marketing plan is about reaching your customers—your sales plan will describe the actual sales process once a customer has decided that they’re interested in what you have to offer. 

If your business requires salespeople and a long sales process, describe that in this section. If your customers can “self-serve” and just make purchases quickly on your website, describe that process. 

A good sales plan picks up where your marketing plan leaves off. The marketing plan brings customers in the door and the sales plan is how you close the deal.

Together, these specific plans paint a picture of how you will connect with your target audience, and how you will turn them into paying customers.

Dig deeper: What to include in your sales and marketing plan

Business operations

The operations section describes the necessary requirements for your business to run smoothly. It’s where you talk about how your business works and what day-to-day operations look like. 

Depending on how your business is structured, your operations plan may include elements of the business like:

• Supply chain management
• Manufacturing processes
• Equipment and technology
• Distribution

Some businesses distribute their products and reach their customers through large retailers like Amazon.com, Walmart, Target, and grocery store chains. 

These businesses should review how this part of their business works. The plan should discuss the logistics and costs of getting products onto store shelves and any potential hurdles the business may have to overcome.

If your business is much simpler than this, that’s OK. This section of your business plan can be either extremely short or more detailed, depending on the type of business you are building.

For businesses selling services, such as physical therapy or online software, you can use this section to describe the technology you’ll leverage, what goes into your service, and who you will partner with to deliver your services.

Dig Deeper: Learn how to write the operations chapter of your plan

Key milestones and metrics

Although it’s not required to complete your business plan, mapping out key business milestones and the metrics can be incredibly useful for measuring your success.

Good milestones clearly lay out the parameters of the task and set expectations for their execution. You’ll want to include:

• A description of each task
• The proposed due date
• Who is responsible for each task

If you have a budget, you can include projected costs to hit each milestone. You don’t need extensive project planning in this section—just list key milestones you want to hit and when you plan to hit them. This is your overall business roadmap. 

Possible milestones might be:

• Website launch date
• Store or office opening date
• First significant sales
• Break even date
• Business licenses and approvals

You should also discuss the key numbers you will track to determine your success. Some common metrics worth tracking include:

• Conversion rates
• Customer acquisition costs
• Profit per customer
• Repeat purchases

It’s perfectly fine to start with just a few metrics and grow the number you are tracking over time. You also may find that some metrics simply aren’t relevant to your business and can narrow down what you’re tracking.

Dig Deeper: How to use milestones in your business plan

Organization and management team

Investors don’t just look for great ideas—they want to find great teams. Use this chapter to describe your current team and who you need to hire . You should also provide a quick overview of your location and history if you’re already up and running.

Briefly highlight the relevant experiences of each key team member in the company. It’s important to make the case for why yours is the right team to turn an idea into a reality. 

Do they have the right industry experience and background? Have members of the team had entrepreneurial successes before? 

If you still need to hire key team members, that’s OK. Just note those gaps in this section.

Your company overview should also include a summary of your company’s current business structure . The most common business structures include:

• Sole proprietor
• Partnership

Be sure to provide an overview of how the business is owned as well. Does each business partner own an equal portion of the business? How is ownership divided? 

Potential lenders and investors will want to know the structure of the business before they will consider a loan or investment.

Dig Deeper: How to write about your company structure and team

Financial plan

Last, but certainly not least, is your financial plan chapter. 

Entrepreneurs often find this section the most daunting. But, business financials for most startups are less complicated than you think, and a business degree is certainly not required to build a solid financial forecast. 

A typical financial forecast in a business plan includes the following:

• Sales forecast : An estimate of the sales expected over a given period. You’ll break down your forecast into the key revenue streams that you expect to have.
• Expense budget : Your planned spending such as personnel costs , marketing expenses, and taxes.
• Profit & Loss : Brings together your sales and expenses and helps you calculate planned profits.
• Cash Flow : Shows how cash moves into and out of your business. It can predict how much cash you’ll have on hand at any given point in the future.
• Balance Sheet : A list of the assets, liabilities, and equity in your company. In short, it provides an overview of the financial health of your business. 

A strong business plan will include a description of assumptions about the future, and potential risks that could impact the financial plan. Including those will be especially important if you’re writing a business plan to pursue a loan or other investment.

Dig Deeper: How to create financial forecasts and budgets

This is the place for additional data, charts, or other information that supports your plan.

Including an appendix can significantly enhance the credibility of your plan by showing readers that you’ve thoroughly considered the details of your business idea, and are backing your ideas up with solid data.

Just remember that the information in the appendix is meant to be supplementary. Your business plan should stand on its own, even if the reader skips this section.

Dig Deeper : What to include in your business plan appendix

Optional: Business plan cover page

Adding a business plan cover page can make your plan, and by extension your business, seem more professional in the eyes of potential investors, lenders, and partners. It serves as the introduction to your document and provides necessary contact information for stakeholders to reference.

Your cover page should be simple and include:

• Company logo
• Business name
• Value proposition (optional)
• Business plan title
• Completion and/or update date
• Address and contact information
• Confidentiality statement

Just remember, the cover page is optional. If you decide to include it, keep it very simple and only spend a short amount of time putting it together.

Dig Deeper: How to create a business plan cover page

How to use AI to help write your business plan

Generative AI tools such as ChatGPT can speed up the business plan writing process and help you think through concepts like market segmentation and competition. These tools are especially useful for taking ideas that you provide and converting them into polished text for your business plan.

The best way to use AI for your business plan is to leverage it as a collaborator , not a replacement for human creative thinking and ingenuity. 

AI can come up with lots of ideas and act as a brainstorming partner. It’s up to you to filter through those ideas and figure out which ones are realistic enough to resonate with your customers. 

There are pros and cons of using AI to help with your business plan . So, spend some time understanding how it can be most helpful before just outsourcing the job to AI.

Learn more: 10 AI prompts you need to write a business plan

• Writing tips and strategies

To help streamline the business plan writing process, here are a few tips and key questions to answer to make sure you get the most out of your plan and avoid common mistakes .  

Determine why you are writing a business plan

Knowing why you are writing a business plan will determine your approach to your planning project. 

For example: If you are writing a business plan for yourself, or just to use inside your own business , you can probably skip the section about your team and organizational structure. 

If you’re raising money, you’ll want to spend more time explaining why you’re looking to raise the funds and exactly how you will use them.

Regardless of how you intend to use your business plan , think about why you are writing and what you’re trying to get out of the process before you begin.

Keep things concise

Probably the most important tip is to keep your business plan short and simple. There are no prizes for long business plans . The longer your plan is, the less likely people are to read it. 

So focus on trimming things down to the essentials your readers need to know. Skip the extended, wordy descriptions and instead focus on creating a plan that is easy to read —using bullets and short sentences whenever possible.

Have someone review your business plan

Writing a business plan in a vacuum is never a good idea. Sometimes it’s helpful to zoom out and check if your plan makes sense to someone else. You also want to make sure that it’s easy to read and understand.

Don’t wait until your plan is “done” to get a second look. Start sharing your plan early, and find out from readers what questions your plan leaves unanswered. This early review cycle will help you spot shortcomings in your plan and address them quickly, rather than finding out about them right before you present your plan to a lender or investor.

If you need a more detailed review, you may want to explore hiring a professional plan writer to thoroughly examine it.

Use a free business plan template and business plan examples to get started

Knowing what information to include in a business plan is sometimes not quite enough. If you’re struggling to get started or need additional guidance, it may be worth using a business plan template. 

There are plenty of great options available (we’ve rounded up our 8 favorites to streamline your search).

But, if you’re looking for a free downloadable business plan template , you can get one right now; download the template used by more than 1 million businesses. 

Or, if you just want to see what a completed business plan looks like, check out our library of over 550 free business plan examples . 

We even have a growing list of industry business planning guides with tips for what to focus on depending on your business type.

Common pitfalls and how to avoid them

It’s easy to make mistakes when you’re writing your business plan. Some entrepreneurs get sucked into the writing and research process, and don’t focus enough on actually getting their business started. 

Here are a few common mistakes and how to avoid them:

Not talking to your customers : This is one of the most common mistakes. It’s easy to assume that your product or service is something that people want. Before you invest too much in your business and too much in the planning process, make sure you talk to your prospective customers and have a good understanding of their needs.

• Overly optimistic sales and profit forecasts: By nature, entrepreneurs are optimistic about the future. But it’s good to temper that optimism a little when you’re planning, and make sure your forecasts are grounded in reality. 
• Spending too much time planning: Yes, planning is crucial. But you also need to get out and talk to customers, build prototypes of your product and figure out if there’s a market for your idea. Make sure to balance planning with building.
• Not revising the plan: Planning is useful, but nothing ever goes exactly as planned. As you learn more about what’s working and what’s not—revise your plan, your budgets, and your revenue forecast. Doing so will provide a more realistic picture of where your business is going, and what your financial needs will be moving forward.
• Not using the plan to manage your business: A good business plan is a management tool. Don’t just write it and put it on the shelf to collect dust – use it to track your progress and help you reach your goals.
• Presenting your business plan

The planning process forces you to think through every aspect of your business and answer questions that you may not have thought of. That’s the real benefit of writing a business plan – the knowledge you gain about your business that you may not have been able to discover otherwise.

With all of this knowledge, you’re well prepared to convert your business plan into a pitch presentation to present your ideas. 

A pitch presentation is a summary of your plan, just hitting the highlights and key points. It’s the best way to present your business plan to investors and team members.

Dig Deeper: Learn what key slides should be included in your pitch deck

Use your business plan to manage your business

One of the biggest benefits of planning is that it gives you a tool to manage your business better. With a revenue forecast, expense budget, and projected cash flow, you know your targets and where you are headed.

And yet, nothing ever goes exactly as planned – it’s the nature of business.

That’s where using your plan as a management tool comes in. The key to leveraging it for your business is to review it periodically and compare your forecasts and projections to your actual results.

Start by setting up a regular time to review the plan – a monthly review is a good starting point. During this review, answer questions like:

• Did you meet your sales goals?
• Is spending following your budget?
• Has anything gone differently than what you expected?

Now that you see whether you’re meeting your goals or are off track, you can make adjustments and set new targets. 

Maybe you’re exceeding your sales goals and should set new, more aggressive goals. In that case, maybe you should also explore more spending or hiring more employees. 

Or maybe expenses are rising faster than you projected. If that’s the case, you would need to look at where you can cut costs.

A plan, and a method for comparing your plan to your actual results , is the tool you need to steer your business toward success.

Learn More: How to run a regular plan review

Free business plan templates and examples

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How to write a business plan FAQ

What is a business plan?

A document that describes your business , the products and services you sell, and the customers that you sell to. It explains your business strategy, how you’re going to build and grow your business, what your marketing strategy is, and who your competitors are.

What are the benefits of a business plan?

A business plan helps you understand where you want to go with your business and what it will take to get there. It reduces your overall risk, helps you uncover your business’s potential, attracts investors, and identifies areas for growth.

Having a business plan ultimately makes you more confident as a business owner and more likely to succeed for a longer period of time.

What are the 7 steps of a business plan?

The seven steps to writing a business plan include:

• Write a brief executive summary
• Describe your products and services.
• Conduct market research and compile data into a cohesive market analysis.
• Describe your marketing and sales strategy.
• Outline your organizational structure and management team.
• Develop financial projections for sales, revenue, and cash flow.
• Add any additional documents to your appendix.

What are the 5 most common business plan mistakes?

There are plenty of mistakes that can be made when writing a business plan. However, these are the 5 most common that you should do your best to avoid:

• 1. Not taking the planning process seriously.
• Having unrealistic financial projections or incomplete financial information.
• Inconsistent information or simple mistakes.
• Failing to establish a sound business model.
• Not having a defined purpose for your business plan.

What questions should be answered in a business plan?

Writing a business plan is all about asking yourself questions about your business and being able to answer them through the planning process. You’ll likely be asking dozens and dozens of questions for each section of your plan.

However, these are the key questions you should ask and answer with your business plan:

• How will your business make money?
• Is there a need for your product or service?
• Who are your customers?
• How are you different from the competition?
• How will you reach your customers?
• How will you measure success?

How long should a business plan be?

The length of your business plan fully depends on what you intend to do with it. From the SBA and traditional lender point of view, a business plan needs to be whatever length necessary to fully explain your business. This means that you prove the viability of your business, show that you understand the market, and have a detailed strategy in place.

If you intend to use your business plan for internal management purposes, you don’t necessarily need a full 25-50 page business plan. Instead, you can start with a one-page plan to get all of the necessary information in place.

What are the different types of business plans?

While all business plans cover similar categories, the style and function fully depend on how you intend to use your plan. Here are a few common business plan types worth considering.

Traditional business plan: The tried-and-true traditional business plan is a formal document meant to be used when applying for funding or pitching to investors. This type of business plan follows the outline above and can be anywhere from 10-50 pages depending on the amount of detail included, the complexity of your business, and what you include in your appendix.

Business model canvas: The business model canvas is a one-page template designed to demystify the business planning process. It removes the need for a traditional, copy-heavy business plan, in favor of a single-page outline that can help you and outside parties better explore your business idea.

One-page business plan: This format is a simplified version of the traditional plan that focuses on the core aspects of your business. You’ll typically stick with bullet points and single sentences. It’s most useful for those exploring ideas, needing to validate their business model, or who need an internal plan to help them run and manage their business.

Lean Plan: The Lean Plan is less of a specific document type and more of a methodology. It takes the simplicity and styling of the one-page business plan and turns it into a process for you to continuously plan, test, review, refine, and take action based on performance. It’s faster, keeps your plan concise, and ensures that your plan is always up-to-date.

What’s the difference between a business plan and a strategic plan?

A business plan covers the “who” and “what” of your business. It explains what your business is doing right now and how it functions. The strategic plan explores long-term goals and explains “how” the business will get there. It encourages you to look more intently toward the future and how you will achieve your vision.

However, when approached correctly, your business plan can actually function as a strategic plan as well. If kept lean, you can define your business, outline strategic steps, and track ongoing operations all with a single plan.

Noah is the COO at Palo Alto Software, makers of the online business plan app LivePlan. He started his career at Yahoo! and then helped start the user review site Epinions.com. From there he started a software distribution business in the UK before coming to Palo Alto Software to run the marketing and product teams.

Table of Contents

• Use AI to help write your plan
• Common planning mistakes
• Manage with your business plan
• Templates and examples

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Master budget: What is it and why is it important?

Ash Baggott

A master budget combines all of the smaller budgets within your business and turns them into one overall budget, so you can get a comprehensive overview of your firm’s finances. The master budget includes the HR, marketing, and all other departmental budgets to produce an overall single budget.

Commonly, it’s thought that it is one large budget of the company. However, it’s not the case, it’s in fact a summary of the divisional budget and is used as a continuous financial plan. Furthermore, it also includes the financial planning, cash-flow forecast, budgeted profit and loss account, and balance sheet of your organisation. Usually, firm’s produce a master budget yearly.

The one year budget planning document encompasses all other budgets, it coincides with the fiscal year and can be split into quarters and further, into months. If you decide that the master budget is going to be an ongoing documents, i.e. rolling year on year, then usually a month is added to the end of the budget to facilitate planning. This is called continuous budgeting.

What’s included?

This depends on the scale of your business, however, no matter the size, it remains the most comprehensive budget planning document. It usually contains two parts; the operating budget and the financial budget.

The operating budget

The operating budget shows the income that’s generated by the activities of the firm, including revenues and expenses. The result is a budgeted income statement.

It’s composed of eight supporting planning schedules, they’re interrelated and come together to develop the income statement. It’s important to note, the operating income isn’t the same as net income, to get a true net income result, you’ll need to subtract out the financial budget.

The eight supporting schedules you’ll need to produce are;

• Sales budget: this is based on the sales forecast and can be adjusted at managerial discretion.
• Production schedule: you should determine the number of sales the company expects to make in the next year, and it should budget how many sales units need to make to meet the sales budget and inventory requirements.
• Direct materials purchases budget: this refers to the raw materials the firm uses in its production process.
• Labour budget: this takes into account the manual costs of the work being carried out.
• Overhead budget: this will include fixed and variable overhead costs.
• Finished goods inventory: this is necessary to complete the cost of goods sold budget and the balance sheet.
• Cost of goods sold budget: this allows you to account for the actual cost of the products you have produced, it assigns a value to every unit of the product based on raw materials, direct labour, and overheads.
• Administrative budget: The selling and administrative expense budget deals with non-manufacturing costs such as freight or supplies.

Operating budgets are prepared first, as information from this is needed to generate the financial budget.

The financial budget

The financial budget shows the inflows and outflows of cash and other parts of the firm’s financial position. In-comings and outgoings of cash come from the cash budget and as such, the result of the financial budget is the budgeted balance sheet.

The three remaining budgets found in the financial budget are;

• Cash budget: this states inflows and outflows of cash, expected borrowing, and expected to invest – on a monthly basis. Any item that isn’t cash is ignored here.
• Budgeted balance sheet: this gives the ending balances of the asset, liability, and equity accounts.
• Budget for capital expenditures: this contains budgetary figures for the large, expensive fixed assets for the firm.

These are the most used budgets within the master budget of a business. To manage your budgets you should consider an invoice and billing software that also saves you much needed time. With Holded you can manage your business expenses and purchases from any device, any time.

Nov 22, 2019

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Business Plan: What It Is, What's Included, and How to Write One

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

• How to Start a Business: A Comprehensive Guide and Essential Steps
• How to Do Market Research, Types, and Example
• Marketing Strategy: What It Is, How It Works, How To Create One
• Marketing in Business: Strategies and Types Explained
• What Is a Marketing Plan? Types and How to Write One
• Business Development: Definition, Strategies, Steps & Skills
• Business Plan: What It Is, What's Included, and How to Write One CURRENT ARTICLE
• Small Business Development Center (SBDC): Meaning, Types, Impact
• How to Write a Business Plan for a Loan
• Business Startup Costs: It’s in the Details
• Startup Capital Definition, Types, and Risks
• Bootstrapping Definition, Strategies, and Pros/Cons
• Crowdfunding: What It Is, How It Works, and Popular Websites
• Starting a Business with No Money: How to Begin
• A Comprehensive Guide to Establishing Business Credit
• Equity Financing: What It Is, How It Works, Pros and Cons
• Best Startup Business Loans
• Sole Proprietorship: What It Is, Pros & Cons, and Differences From an LLC
• Partnership: Definition, How It Works, Taxation, and Types
• What is an LLC? Limited Liability Company Structure and Benefits Defined
• Corporation: What It Is and How to Form One
• Starting a Small Business: Your Complete How-to Guide
• Starting an Online Business: A Step-by-Step Guide
• How to Start Your Own Bookkeeping Business: Essential Tips
• How to Start a Successful Dropshipping Business: A Comprehensive Guide

What Is a Business Plan?

A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

• A business plan is a document describing a company's business activities and how it plans to achieve its goals.
• Startup companies use business plans to get off the ground and attract outside investors.
• For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
• There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Understanding Business Plans

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

How to Write a Business Plan

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

Common Elements of a Business Plan

The length of a business plan can vary greatly from business to business. Regardless, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

• Executive summary: This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
• Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
• Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
• Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
• Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

A business plan is not a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections to begin with. Markets and the overall economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All of this calls for building some flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on the nature of the business. A well-established business might want to review its plan once a year and make changes if necessary. A new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

The Bottom Line

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

U.S. Small Business Administration. " Write Your Business Plan ."

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Module 9: Operating Budgets

Introduction to the master budget, what you’ll learn to do: discuss the purpose of an master budget.

Every company needs a master budget! The components of this budget are outlined in this unit, along with the order in which they need to be completed. Certain data is needed before the next set of budgets can be completed. Giving the responsibility of the budget to the employees involved in each component of the work can be helpful in insuring that you have set reasonable and attainable budgeting goals.

Let’s take a look at the components of a master budget and how they interrelate.

• Introduction to the Master Budget. Authored by : Freedom Learning Group. Provided by : Lumen Learning. License : CC BY: Attribution

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Musi River Front Development: Consultants invited for master plan

Musi River Front Development Corporation invited the consultants last month and applications submitted by the applicants are likely to be opened on May 18.

Hyderabad: The State government is drawing grand plans for executing the River Musi Front Developmen t project and consultants have been invited for preparing the aggregate master plan for the project. The master plan would be prepared for a site area covering 55 km of the River Musi. This excludes the one km influence zone on either side totaling to an area of 110 square km. Musi River Front Development Corporation invited the consultants last month and applications submitted by the applicants are likely to be opened on May 18.

The exercise to prepare the master plan is split into four components, including Blue-Green Master Plan, Land use Master Plan, Infrastructure Master Plan and Financial Master Plan. Among different exercises to be taken up, the consultants would have to conduct an analysis of existing climatic conditions and flora of the region for inputs into the master planning and preliminary design of the demarcated area. They would have to integrate specific measures for implementation of a sustainable development apart from those stipulated by government regulations. These measures would include integrated water management, rain water harvesting, water reuse, integrated solid waste management plan, use of renewable energy and use of sustainable materials during construction. The consultants would have to assess all the prior site surveys and validate the project boundary and demarcation of the site. They have to carry out geotechnical investigations and sub-surface explorations for proposed bridges or highway structures over the river and high embankments and conduct all relevant laboratory and field tests on soil.

• CM holds meetings on Musi riverfront development in Dubai
• Europe-like bridges on Musi, Esa rivers

The consultants have to assess existing infrastructure and propose improvements to enable the flow of clean and recycled water into River Musi. They have to prepare a detailed master plan including geo-referenced cadastral maps for the identified land area.

Under Blue-Green Master Plan focus was being laid on technology solutions for flow of clean or recycled water in the river. Bioengineering techniques for stabilizing the river banks and promoting natural flood plain processes to mitigate impact of flooding. Similarly, under Green Master plan plans are on to develop open space and landscape strategies, besides beautification. In the Land Use master plan, a base map would be prepared, which highlights the built up features within the site, existing road network, water bodies, streams, hillocks and forests etc.

Under Infrastructure master plan, a design basis report for all roads, bridges and utility services would be prepared. In the Financial Master Plan, a financial feasibility model would be developed by considering different parameters, including costs for development, project structuring etc.

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