SALES BUDGET: OBJECTIVES, HOW IT IS PREPARED, EXAMPLE - DUDAS - 2025

The sales budget is a report that shows the sales expectations of the management of a company for a future financial period, both in units and in monetary value.

Although a sales budget is only an early estimate of revenue, it is a vital means of projecting revenue based on factors such as economic conditions, competition, production resources, and expenses.

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A company uses this budget to set goals for the sales department, calculate profit, and forecast production requirements.

Business leaders often create a sales budget first, because it establishes a template for the other budgets that are critical to the success of a business.

The sales budget affects both other operating budgets and the company's master budget. It is generally presented in a disaggregated form, in a maximum monthly or quarterly format.

Budget adjustments

It is quite difficult to generate a sales forecast that proves to be accurate for any period of time. A viable alternative is to periodically adjust the sales budget with the revised estimates.

If this is done, the rest of the budgets that are derived from the sales figures will also need to be reviewed, which can take a significant amount of time.

Small businesses, with limited product and territory categories, can deploy an overall sales budget.

Large companies, with a wide variety of products, usually break down the budget into product categories and / or geographic regions to keep it simple.

Generally, it is best not to include any sales estimates related to potential acquisitions of other companies in the sales budget, as the timing and amounts of these sales are too difficult to estimate.

Instead, the sales budget should be reviewed after an acquisition has been finalized.

What is the sales budget?

A sales budget is an estimate of sales for a future accounting period. They are often divided into estimates for the first, second, third, and fourth fiscal quarters.

This budget calculates the sales in units, as well as the estimated revenue from these sales. This is very important for any business.

Management carefully analyzes economic conditions, market competition, production capacity, and selling expenses when developing the sales budget.

All of these factors play an important role in the future performance of the company. Basically, the sales budget is what management expects to sell and the revenue raised from these sales.

Without a budget, companies cannot track processes or improve their performance. The first step in creating a company's master budget is creating a sales budget.

Budget components

The critical components of a sales budget are the estimated sales per unit, the price per unit, and the allowance for discounts and returns.

Estimated unit sales multiplied by unit price equals budgeted gross sales. These gross sales minus the estimated sales discounts and returns will be the budgeted net sales for the period.

A sales budget contains different elements, depending on the organization of the company. Many business owners create this budget using a macro list of projected sales amounts and the cost to incur to meet those sales.

In some companies, this budget also includes salaries, bonuses and commissions, as well as advertising and promotions. Creating a sales budget helps the business in different ways.

goals

Generate basic strategies

Without a sales budget, managers, supervisors and grassroots workers will not be able to develop the strategies necessary to make the year profitable.

After making the sales budget, a strategic planning process can be carried out with all the staff, to turn the budget into something concrete and actionable.

The budget allows evaluating the resources that are needed and the cost of those resources in order to achieve the established objectives.

If the sales budget has decreased from the previous year, managers need to figure out how to use the resources given to them to get the job done. In some cases, the sales budget may need to be adjusted.

Improve cash flow management

Creating a sales budget is one of the keys to improving your company's cash flow management.

When sales are good, the marketing budget can be increased by using a formula that links increases in spending with increased sales.

Marketing expenses can also be increased step by step, so that in the event that sales volume falls, the sales budget can be reduced and thus maintain a profit margin.

The sales budget also has a direct impact on the production budget, because the production budget details how many products or services need to be made to meet sales targets.

Set specific sales goals

A sales budget includes specific sales amounts that must be achieved, providing the team with milestones that will help set the agenda for a month, quarter, semester, or fiscal year.

When sales people understand your expectations of them, they are more likely to work diligently to meet those expectations, especially if the sales manager can use those milestones to propel staff to greater achievement.

The sales budget also helps to evaluate the performance of the sales department. For example, it may be found that revenue has increased, but also costs of sales have increased, which means a lower profit margin.

Then you could determine where to make cuts in selling expenses. Likewise, it could be determined whether the members of the sales team are underperforming than expected.

Help determine a spending overload

Creating a sales budget also helps determine your overhead. It allows you to evaluate the potential profit margins in order to establish the appropriate pricing strategies.

Some business owners include all non-production expenses in a single overhead category. Others divide overhead into general, administrative, and selling expenses.

Using a sales budget as a projection of income and expenses, this helps in planning all other budgets, especially if each budget is created based on the projection of income.

Importance

It is extremely important to do the best forecasting job possible. This is because the information in the sales budget is used by most other budgets, such as the production budget and the direct materials budget.

Therefore, if the sales budget is inaccurate, so will the other estimates that use it as source material.

Information about projected sales in units of the sales budget is entered directly into the production budget. From this budget the budgets for direct materials and direct labor will be created.

The sales budget is also used to give managers a general sense of the size of the operations. In this way you can create the master budget and the budget for sales and administrative expenses.

The total amount in net sales in the sales budget is transferred to the revenue line in the master budget.

Sales budget and other budgets

The sales budget not only sets goals for the business, but also provides a framework for the other budgets of the business. All other quotes are based on the sales budget.

Although the sales budget is more useful for the sales department, it has other uses. It is the starting point for the different operating budgets that contribute to the company's master budget.

A business must know how many products it will sell and how much revenue will be generated before it can determine purchase, production, and capital expenditure budgets.

Estimates in the sales budget directly affect the number of products estimated in the production budget. This, in turn, affects direct materials, direct labor, and manufacturing overhead.

Sales budget to actual

At the end of the accounting period, management performs a comparative analysis of the sales budget with the actual sale. Management can analyze performance using a flexible budget or a static budget.

A static budget compares actual results to budgeted projections, regardless of how many units are sold. A flexible budget matches the budgeted revenue figure with the actual amount sold.

As elaborated?

Select a period

Although it is common to use an annual sales budget, some companies have quarterly or even monthly sales budgets.

Collect historical sales data

If you are budgeting for sales in an existing business, you should be able to check past sales records. The sales data used must be from the same period prior to the budget being prepared.

For example, if you are working on a budget for the next spring quarter, you use data from a previous spring quarter to minimize the effect of seasonal factors on sales.

Locate industry sales from outside sources

Actual sales data can be obtained from the annual and quarterly reports of public companies. However, that information will only be available to large companies.

The Bureau of Labor Statistics can provide growth estimates and other important financial data about the industry.

Your local chamber of commerce can provide information on local companies and connect you with industry colleagues.

Compare sales with past periods

For example, count the number of salespeople who work for the company and compare it to past sales periods.

If the number of sellers has increased or decreased, the estimated sales amounts should be increased or decreased accordingly.

Ask sellers for their own personal projections for the next sales period. Your first-hand knowledge and experience can certainly help you make accurate projections.

Research current market trends

Although past sales offer a good starting point for your budget, past performance doesn't always predict future results. If market trends are changing, they will most likely affect the company's revenue as well.

For example, if the company makes plastic CD cases and CD sales are falling, sales estimates may have to be lowered as well.

Talk to customers and sales people

The intention to buy the products is a strong indicator of future sales. If customers tend to buy at certain times of the year, this trend must be taken into account in the sales budget.

Sales reps have key information about customer concerns. This information can help management predict future performance.

Marketing provides information on sales promotions, which could alter sales. It also reports on new product introduction dates, as well as old product recall dates.

Create budget

Based on past sales, current market status, strength of sales staff, specific production capacity and customer trends, the best estimate of sales will be made during the next budget period.

The basic calculation is to detail in one row the amount of expected sales in units. Then the expected average unit price is listed in the next row, and the total revenues in a third row.

The unit price may be adjusted for marketing promotions. If sales discounts or returns are anticipated, they should also be listed.

Compare actual results with budgeted

Once the projected sales period is over, you will see how close the projected sales were to the actual ones. Any variation found can help to prepare future budgets with greater precision.

Example

Suppose Company ABC plans to produce a large variety of plastic buckets during budget year 2017. All of these buckets belong to a single product category. Your sales budget is summarized as follows:

As can be seen, the ABC sales manager expects that the increase in demand in the second half of the year will allow him to increase his unit price from $ 10 to $ 11.

Additionally, the sales manager expects the company's historical sales discount percentage of 2% of gross sales to be sustained over the budgeted period.

This example of the sales budget is simple, because it is assumed that the company sells only one category of products.

References

1. Steven Bragg (2017). Sales budget - Sales budget example. Accounting Tools. Taken from: accountingtools.com.
2. My Accounting Course (2018). What is a Sales Budget? Taken from: myaccountingcourse.com.
3. The Balance Small Business (2018). A Sales Budget is Central to Effective Business Planning. Taken from: thebalancesmb.com.
4. Madison Garcia (2017). What is a Sales Budget? Bizfluent. Taken from: bizfluent.com.
5. John Csiszar (2018). How to Prepare a Sales Budget. Small Business - Chron.com. Taken from: smallbusiness.chron.com.
6. Sampson Quain (2018). Why Is a Sales Budget Important? Small Business - Chron.com. Taken from: smallbusiness.chron.com.