Meaning, Types of Sales budget

1st August 2020 1 By indiafreenotes

A sales budget estimates the sales in units as well as the estimated earnings from these sales. Budgeting is important for any business. Without a budget companies can’t track process or improve performance. The first step in creating a master company while budget is to create a sales budget.

Like every department, even the Sales department has a budget and adhering to that budget is very important since the Sales Budget is a basic component of the master budget. Sales Budget shows the expenses that have to be made to achieve sales in a defined period of time.

Sales Budget is also associated with determining average estimated earnings after the pre-determined period. A company, at the start of the year, carefully analyzes economic conditions, competition, production capacity, and expenses when determining the sales budget. All of these factors play a crucial role in the company’s future performance. Sales Budget is what the company expects to sell and generate business from.

Cambridge dictionary defines Sales Budget as: “a plan of the money that a company must spend in order to produce and sell goods or provide services in a particular period.”

While determining Sales Budget, one must be aware of the term Sales Forecasting, which means predicting the amount of sales that may happen in a defined period. This is much more than “gut-feeling” and it is determined on the basis of Previous Sales Achieved, Market conditions, industry growth rate, customer analysis, and such factors. Giving a proper forecast for Sales is important since Sales Budget depends on proper forecasting

A sales budget is an estimate of expected total sales revenue and selling expenses of the firm. It is known as a nerve centre or backbone of the enterprise. It is the starting point on which other budgets are also based. It is a forecasting of sales for the period both in quantity and value. It shows what product will be sold, in what quantities, and at what prices.

The forecast not only relates to the total volume of sales but also its break-up product wise and area wise. The responsibility for preparing sales budget lies with the sales manager who takes into account several factors for making the sales budget.

Some of these factors are:

(i) Past sales figures and trend

(ii) Estimates and reports by salesmen

(iii) General economic conditions

(iv) Orders in hand

(v) Seasonal fluctuations

(vi) Competition

(vii) Government’s control

Importance of Sales Budget:

1) Business Budgeting:

The budgeting of different departments might be dependent on the Sales Budget. This is especially true in a production company where the production expenses are proportional to the amount of sales you hope to achieve. Without expected Sales Budget, the company doesn’t know how much to spend on Marketing, how much to spend on production and in any other department. While these are variable expenses, the fixed expenses like rent and utilities also have to be covered from sales budget.

2) Growth Goals:

Another aspect of Sales Budget is that it sets targets for the Sales team and achieving those targets will help the company to grow economically and expand. The Sales team is motivated by giving incentives on hitting numbers and crossing them. The company can expect an overall growth in every department once Sales numbers are achieved.

3) Performance:

Sales Budget is prescribed to the Sales team at the beginning of the year and the targets are distributed accordingly. At the end of the year, this budget can be used to know the performance of the sales team and, in turn, the performance of the organization. This depends on the forecasting done and also on the market conditions and competitor activities. But Sales Budget helps analyze the performance of every sales team member quantitatively.

Process of Sales Budget

Most organizations use a bottom-up planning method to determine Sales Budget. All the budgets from every Salesperson are collated and sent to the manager, every manager’s budget is sent to Regional in charge and so on and so forth till a single collective statement is generated. The top management then makes necessary changes and adjustments and syncs it with organizations vision and percolates the budget top-bottom.

The total Sales Forecast with unit price will give gross sales. Sales discounts and allowances, if any, are deducted and the final figure will the Net Sales realized.

To chalk out a few common steps carried out in Sales Budget would be:

  1. Research and Analysis: Check the status of the market for scenarios
  2. Sales Forecast: The Sales team then prepares a forecast based on past achievement and market conditions put together. Generally, a growth is expected.
  3. Collecting Forecasts: All the forecasts are collected together and sent to higher management as a single file.
  4. Modification and review: The top management then decides on the Sales Budget obtained, takes reviews and suggestions and decides a final figure.

Although these are the common steps in every sales budget, every company may modify according to their needs.

Methods of Sales Budgeting

There are a variety of methods which can be used to prepare a sales budget.

The following are some of the popular methods to prepare a sales budget:

Affordable Budgeting

This is a method generally used by organizations dealing in industrial goods. Also, firms, which do not give importance to budgeting or firms which are having small size of operation, make use of this judgmental method.

Rule of Thumb

Such as a given percentage of sales. Companies involved in mass selling of goods and companies dominated by the finance function are the major users of this method.

Competitive Method

A few companies, the products of which face tough competition and many challenges in selling and which need effective marketing strategy to maintain profits, make use of this method. Using this method needs knowledge of how our competitor is working with regards to resource allocation.

Companies make use of a combination of the above methods. Depending upon the past experiences, budgeting approaches are refined time to time. The status of the sales & marketing helps the organization to figure out the extent of sophistication needed in approaching sales budgeting.

Advantages

Planning: Sales Budget helps in the proper planning of the organizational budget.

Resource allocation: Sales Budget helps in the allocation of resources for all other departments based on Sales forecast, sales plan and other factors.

Expense Check: Sales Budget is also helpful to keep a check on the expenses of the company.

Yardstick: Sales Budget serves as a yardstick for evaluation of Forecast vs achievement or Target vs Achievement and overall economy of the company.

Weak areas: Sales Budget also helps identify weak links and areas in the organization which are a hindrance in achieving the sales budget. Necessary actions can be taken to correct those weak links and strengthen the front line.

Guide: Sales Budget acts as a guide and constant reminder throughout the year for the organization about the agreed budgets and helps everyone to be on track.

Disadvantages

Sales budget cannot always be 100% accurate since no one can predict future events or sudden market trends for the company.

A sales budget decided by authority or management may not go well for various reasons. The unrealistic sales budget is a common complaint by the front line executives.

Preparing, editing, modifying, re-working, and getting the approval of sales budget can take up too much of managerial time, in which time actual sales can be realized.

Unforeseen expenses are not considered in Sales Budget which may arise out of any calamity or unpredicted market conditions.