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23.4 Prepare Operating and Financial Budgets (Integrated)

Master Budget​

A master budget combines operating and financial budgets to provide a complete financial plan.

Components:

  • Operating budget (sales, production, COGS, income statement)
  • Financial budget (cash, capital expenditures, balance sheet)

Steps to Prepare a Master Budget​

  1. Sales Budget: Start with sales forecast
  2. Production/Service Budget: Determine output needed
  3. Materials, Labor, Overhead Budgets: Plan inputs
  4. Selling & Administrative Budget: Plan operating expenses
  5. Budgeted Income Statement: Summarize profitability
  6. Cash Budget: Plan cash flows
  7. Capital Expenditure Budget: Plan investments
  8. Budgeted Balance Sheet: Project financial position

Example: Integrated Budget for Le Petit Bistro​

Annual Sales Forecast:

  • Q1: €280,000
  • Q2: €320,000
  • Q3: €360,000
  • Q4: €300,000
  • Total: €1,260,000

Cost of Goods Sold (35% of sales):

  • Q1: €280,000 × 35% = €98,000
  • Q2: €320,000 × 35% = €112,000
  • Q3: €360,000 × 35% = €126,000
  • Q4: €300,000 × 35% = €105,000
  • Annual COGS: €441,000

Operating Expenses:

  • Fixed (per quarter):

    • Salaries: €30,000
    • Social charges: €7,500
    • Rent: €15,000
    • Insurance: €2,000
    • Other fixed: €13,000
    • Total fixed per quarter: €67,500
    • Annual fixed: €270,000

  • Variable (8% of sales):

    • Q1: €280,000 × 8% = €22,400
    • Q2: €320,000 × 8% = €25,600
    • Q3: €360,000 × 8% = €28,800
    • Q4: €300,000 × 8% = €24,000
    • Annual variable: €100,800

  • Total Operating Expenses: €370,800

Budgeted Income Statement (Annual):

  • Sales: €1,260,000
  • Cost of goods sold: €441,000
  • Gross profit: €819,000
  • Operating expenses: €370,800
  • Operating income: €448,200
  • Taxes (20%): €89,640
  • Net income: €358,560

Cash Budget (Simplified Quarterly):

  • Q1:

    • Beginning cash: €40,000
    • Collections: €280,000 × 70% = €196,000 (current) + €30,000 (beginning AR) = €226,000
    • Disbursements: €98,000 (COGS) + €67,500 (fixed) + €22,400 (variable) + €10,000 (VAT) = €197,900
    • Net cash flow: €28,100
    • Ending cash: €68,100

  • Q2:

    • Beginning cash: €68,100
    • Collections: €320,000 × 70% + €280,000 × 30% = €308,000
    • Disbursements: €112,000 + €67,500 + €25,600 + €12,000 (VAT) + €50,000 (capex) = €267,100
    • Net cash flow: €40,900
    • Ending cash: €109,000

Budgeted Balance Sheet (Year End):

  • Assets:

    • Cash: €109,000 (from Q4 ending)
    • Accounts receivable: €300,000 × 30% = €90,000
    • Inventory: €105,000 × 20% = €21,000
    • Fixed assets (net): €180,000 + €50,000 - €15,000 = €215,000
    • Total assets: €435,000

  • Liabilities:

    • Accounts payable: €12,000 (estimated)
    • Loans: €100,000 - €20,000 = €80,000
    • VAT payable: €5,000 (estimated)
    • Taxes payable: €20,000 (estimated)
    • Total liabilities: €117,000

  • Equity:

    • Beginning retained earnings: €150,000
    • Net income: €358,560
    • Ending retained earnings: €508,560
    • Total equity: €508,560

Coordinating Budgets​

  • Sales affect production and purchasing
  • Production affects materials, labor, overhead
  • Operating budgets drive cash budget
  • Cash budget informs financing needs

Communicating the Master Budget​

  • Provide summary reports to management
  • Provide detailed budgets to responsible managers
  • Use dashboards for key metrics

Luxembourg Compliance Note​

Integrated budgets help Luxembourg SMEs coordinate VAT payments, social charges, taxes, and capital investments. Banks may request master budgets when evaluating loan applications.

Think It Through​

Why must budgets be coordinated across departments? What happens if sales, production, and cash budgets are misaligned?