What is a Sales Budget?
The sales budget, a type of operating budget, is a forecast of the expected units a company intends to sell over a period of time and the revenue it should generate from it. It is the basis for preparing the income statement for the business. The management prepares a sales budget based on its business environment, overall economic condition, the intensity of competition in the market, production capacity, available funds, etc.
A sales budget acts as a yardstick for evaluating the company’s performance. It serves as a reminder to meet the plans and targets. Also, if the company’s actual performance is not on par with the budgeted figures, the company can take corrective action in time.
The sales budget is the base on which other budgets are prepared in an organization. Hence, it should be prepared with the utmost care and precision. For example, the sales budget will help prepare the production budget as production will depend on the planned sales quantity. Similarly, budgets such as the purchase budget or budget for the HR department will be directly dependent on the quantity the company intends to sell. In case the sales budget forecasts fail to meet expectations, it can be disastrous for the company. This will be so when it has made purchases accordingly or hired extra manpower to meet the sales figures. In the opposite case, with low budgetary forecasts, the company will face a shortage of materials and manpower, which will lead to a loss of sales opportunities.
Read more about Operating Budget.
What are the steps to prepare a Sales Budget?
Budget Period
The first step in preparing a sales budget is to determine a specific period for which it is to be made. This can be monthly, quarterly, or annually.
Also Read: Operating Budget
Sales Data
The next step is to collect sales data from the company for the corresponding period of previous years. This will help to make a realistic and achievable budget.
An estimate of that industry’s total sales, the company’s market share, and the market share’s growth should also be considered.
Market Trends
A proper forecast can only be made after a thorough study of the current market trends, economic scenario, seasonal fluctuations in demand, evolving competition, new products or changes in consumer preferences, etc.
Production Capacity
A sales budget can be successful only if the company has sufficient production capacity for the forecasted numbers. Also, outsourcing opportunities, if any, or procuring from another supplier and reselling it should also be considered.
Sales Budget Preparation
The usual method to prepare a sales budget is to follow bottom-up planning. This implies that every departmental head will be responsible for providing future sales figures and revenue generation expected from their department. These figures will go to the central sales department, which will finalize the company’s sales budget.
Also Read: Master Budget
Comparing Results
The actual numbers have to be compared with the budgeted numbers after the implementation of the budget. Corrective action can accordingly be taken in case of wide fluctuations in the forecast.
What are the Factors that Affect the Sales Budget?
Sales Trend and Capacity
The last few years’ sales trend will help to decide how much to produce that can be sold. Also, an organization’s production and financial capacity will majorly affect the budget. If the company cannot produce or procure enough units of the product to match the sales forecast, the budget will not be useful.
New Launches
If a company plans to launch new products shortly, the budget should incorporate the increase in sales expected and the additional revenue generated.
Seasonal Fluctuations
The seasonal fluctuations a business normally faces affect the budget. Festivals, weekends, weddings, etc., may affect the sales and revenue of many products.
Advertising and Publicity
The budget will be affected by the amount a company decides to spend on advertising and publicity and the offers and discounts it provides on its products. Also, the choice of new distribution channels will directly impact sales and the company’s budget.
Change in Prices
A company may face a sudden increase or decrease in the prices of inputs due to uncontrollable external factors such as a natural calamity or shortage of raw material. This will affect the prices and sales of its products, thus affecting its budget.
Growing Competition
The entry of new rivals and a sudden increase in competition may directly affect sales of a company’s products. This will impact the budget.
Changes in Government Policy
A change in government policy or rules regulating a particular product affects the sales and its budget. The government may make a policy change to ban a particular product, like tobacco or cigarettes. Hence in such situations, the budget will totally go wrong.
Changes in Consumer Demand
Demand for a product may change due to changes in the tastes and preferences of consumers. For example, consumers may shift their consumption of fried foods to healthy diet food due to rising health awareness. This will impact the sales budgets of companies making fried food.
Economic Situations and Technology
Economic situations like a recession or depression will affect the sales of products and their budget. Also, the advent of new technology may increase the production capacity of a company considerably. Therefore, this will result in an increase in sales and will affect its budget.
Importance of Sales Budget
How Much to Produce?
This budget gives answers to important questions like what and how much to produce. Also, it sets a target for the team to sell and generate revenue. This helps keep the team motivated and work hard to achieve the goals. It also helps the management properly allocate limited economic resources to the planned goods, services, and territories.
Estimation of Overheads and Preparation of Budgets
The budget helps to estimate overhead costs related to administration and selling. These are the costs other than the manufacturing costs and have to be properly budgeted for. Thus, the management can accordingly prepare budgets for administrative expenditure, advertising and publicity, distribution expenditure, recruitment, and human resource department.
Estimation of Cash Flow
It helps the management ascertain how much cash to expect from sales activities over the budget period. This will help them keep a check on the company’s liquidity position.
Measure of Control
It is vital for measuring the performance of the sales team. Sales figures are the pillars on which all the other departments are dependent. The management can keep checking the actual sales figures from the budgeted figures. Thus, checking deviations from the budget is possible in time, and they can take action to fill the gap.
Quiz on Sales Budget
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