Planning is the process of setting goals and objectives and translating them into activities and resources required for accomplishment within a specified time horizon. Budgeting is the quantifying of a company’s financial plans and activities.
Budgets facilitate communication, coordination, and teamwork. A master budget is the comprehensive set of projections for a specific budget period, culminating in a set of pro forma financial statements. It is composed of operating and financial budgets and is usually detailed by quarters and months. Some companies prepare continuous budgets by successively adding a new budgetary month, 12 months into the future, as each current month expires.
Sales demand is the proper starting point for the master budget. Once sales demand is determined, the cost accountant forecasts revenues, production quantities and costs, and cash flows for the firm’s activities for the upcoming period. These expectations reflect the firm’s inflows and outflows of resources.