Question

Why is the sales forecast so important in developing the master budget?

Answer 1

A master budget is constructed after the collection of projected sales and development of subsidiary budgets.

The main reasons why sales forecast is considered important in developing the master budget is because

the forecast sales give actual accounts of seasonal fluctuations in company’s cash flow. The sales forecast reveals instances of laxities within the production system and how the company can act towards filling the financial gaps either through short-term borrowing or through engaging cash surpluses. The components of a sales forecast budget include accounts receivable and allowance for uncollectible, which are
projected finances for the company and once collected form part of the company revenues. The sale forecast allows managers to translate information in sales revenues into cash receipts. Similarly, the sale forecast budget allow management to prepare estimated accounts for cash disbursements which can be used to prepare final accounts payable through purchase information.