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.
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.
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.