Master Budget Creation Process for Service Companies
According to Accounting Tools (2022), a master budget is a budget planning that includes various lower-level budgets prepared by a company’s various functional units, along with planned financial statements, a cash projection, and a financing strategy. The master budget is typically given quarterly or monthly and includes the entire fiscal year of the company.
As for the service companies, a service company is one that generates revenue by providing services instead of selling tangible products. Because these companies do not have raw materials or product stocks, they do not have budget lines for manufacturing or purchasing. Rather, the emphasis is on the expected sales revenue from a given service (Heisinger & Hoyle, n.d.).
Service companies include software houses, real estate brokers, recruiting agencies, consultants, accounting firms, financial advisors, and insurance organizations. These companies do not make money by selling physical goods; instead, they provide services to clients based on specialized skills or specialization (Heisinger & Hoyle, n.d.).
Master Budget Creation Process for Service Companies
Walther & Skousen (2009) stated that the direct labor budget flows directly into the cash budget and the budgeted revenue statement for a service company. Service businesses often do not require production or overhead expenses. Overstaffing can reduce revenues while understaffing might force employees to work extra hours. Their primary concern is predicted sales and labor expenses.
The operating and financial budgets would be combined in the master budget for the service industry. Labour, service overhead, and selling and administrative expenditures are all covered by the operational budget. It includes a budgeted revenue statement, a cash budget, capital expenditures, and a planned balance sheet under financial budgets. However, the sales budget must be developed before all other budgets in order to forecast sales volume and overall income (Heisinger & Hoyle, n.d.).
I work in a software house, our product mostly is web app development, data analytics, and AI/ML models. We deliver our service based on our clients’ needs. Therefore we don’t have actual tangible products that are ready to be sold.
In order to create a master budget, our company’s management must first estimate sales revenue to calculate the sales budget. Then after that, we start developing operational and financial budgets. The operational budget includes revenue, variable costs, fixed costs, and non-cash expenses. Because we don’t need to consider any manufacturing or material costs, in my company the variable costs mostly consist of labor costs (more than 60%) since mostly we are working with overseas remote workers on an hourly basis. Next in the financial budget, we develop a budgeted balance sheet, cash flow budget, and budgeted income statement. Next, we move to the preparation of a cash budget as well as a budget for expenditures unrelated to the services including overhead costs. Lastly, we create the Financial statement preparation based on the forecasts.
How Would The Budget Process For The Service Company Differ From A Manufacturing Company
According to Gerard (2022), service companies often have minimal overhead expenses since they store little to no inventory and employ a limited number of people. In comparison to other company kinds, this leads to a higher percentage of revenue turning to profit, however, the overall amount of money may be modest depending on the service. A service provider’s budget process concentrate on the quantity of revenue received and the types of costs incurred. If the service does not necessitate them, expenses that are prevalent in other sorts of enterprises may be omitted from the income statement.
While manufacturing companies often generate more money than other types of businesses because their goods are sold to retailers, other manufacturers, and directly to customers. Manufacturing equipment, raw materials, and the number of personnel necessary to manage a manufacturing company raise the amount paid to create this revenue, but result in a lower profit compared to business income. the budget process for manufacturing companies is often more robust than for service companies since manufacturers face a broader variety of expenditures than firms that do not require costly equipment, maintenance, shipping services, or personnel (Gerard, 2022).
Conclusion
Master budgets are significant for companies since they assist organizations plan and also serve as a reference to compare an organization’s actual performance to the expected output through the master budget. Also, the process of creating a master budget will depend on the nature of the company itself. Budget planning for service companies will be heavily focused on revenue projections resulting from prospective leads. Manufacturing businesses, on the other hand, will focus on revenue projections from product sales.
References
Accounting Tools. (2022, January 29). Budgeted income statement definition — AccountingTools. AccountingTools. Retrieved July 21, 2022, from https://www.accountingtools.com/articles/budgeted-income-statement
Gerard, J. (2022). Differences between a merchandisers income statement and a manufacturing companies income state. Small Business — Chron.com. Retrieved July 22, 2022, from https://smallbusiness.chron.com/differences-between-merchandisers-income-statement-manufacturing-companies-income-state-34015.html
Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html
Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting. https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-accounting.pdf
Note:
This article is written based on University of The People Managerial Accounting (BUS 5110) written assignment by Fristy Tania in July 2022
