Businesses need to manage both their distribution and financing activities. Distribution activities involve shipping inventory to company facilities and to customers. Financing activities ensure that the company holds enough cash to finance its operation. As the business owner oversees his distribution and financing activities, he prepares a master budget. The master budget allows the business owner to consider the expected costs of distribution and the financing needs for the following year.
The master budget includes all components of the financial plans for the following year. This includes a sales budget, an expense budget for each department and a cash budget. Each component builds on the other sections of the budget. The sales budget considers the anticipated sales for the following year and forms the basis for the expense budgets.
The distribution department facilitates the transport of products between company sites and to customers. These activities require the company to hire truck drivers and purchase delivery trucks. Some companies use pickup trucks while other companies need tractor-trailers. Worksites and customer facilities may be located in the same city or in different states. Some companies transact business with customers in other countries and maintain a distribution facility in those locations. The company uses its distribution expense budget to determine its costs for the year.
Distribution Expense Budget
The expense budget for the distribution department constitutes one segment of the master budget. The manager of this department considers driver wages, vehicle maintenance and fuel costs for the upcoming year. These costs form the basis for the distribution expense budget.
Financing activities involve borrowing money or selling stock in the company. Both activities gain additional funds which the company can use to maintain current operations or to pursue new strategies. If the company chooses to borrow money, it needs to consider whether to obtain a bank loan or to issue bonds. If the company sells stock, it needs to consider whether to seek investors personally and keep the company small or whether to issue stock through the stock market. The company uses the cash budget to determine its financing needs.
The cash budget forms another component of the master budget. The cash budget considers the available cash balance each period throughout the year. The company estimates its expected cash receipts and cash disbursements to determine where it might lack enough money to operate. The company needs to plan its financing needs for these times. These cash receipts and disbursements appear on the cash budget.