Why is a Sales Budget needed? – Its importance and process
It is the sales order book that a business’s continuity is dependent upon. The existence of a business depends upon the sales it is going to make and the ability with which it can generate revenue. That is why a sales budget is a critical one to be prepared meticulously. It is a forecast of what the business can realistically sell to its customers during the period for which such a budget is prepared.
In this blog, we discuss the meaning of a sales budget, factors that influence it, and how you can prepare one.
What is a sales budget?
A sales budget is the cornerstone of planning and forms the foundation of budgetary control. It serves as a benchmark by which the company’s performance can be measured. It acts as a reminder to stick to the plans and objectives of sales. In addition, if the company’s actual performance falls short of the budgeted figures, it may take corrective steps quickly.
Technically speaking, a sales budget is a quantitative and financial statement of sales, that is prepared prior to a specified period of time, with the goal of achieving those sales during that period.
It is a forecast of total sales likely to be achieved in a future period, expressed in terms of money or quantity or both.
Keynote: A sales budget is essentially an estimate of sales to be achieved in a budget period. It is also known as ‘revenue budget’.
A sales budget is prepared for each product. This includes two parameters:
1. the quantity of estimated sales, and
2. the expected unit selling price.
Its Importance – Why is the sales budget usually prepared first?
Sales budget assumes primary importance and it is the foundation upon which all other budgets are developed. This budget is often the starting point since usually, the limiting factor is sales. The quantity which can be sold may be the most important budget factor in many business undertakings. If such quantity is not estimated accurately, it would falsify all other business estimates and decisions. For example, if the sales budget is not weighed before planning a production budget, it may so happen that a company produces more than what is saleable and the entire production of the company might not be sold. Thus, in any case, an accurate sales estimate is needed in order to create a practical budget plan. (Source)
The production budget must be in sync with the sales forecast. Also, there must be a reasonable degree of accuracy in preparing the sales budget. Unless sales are correctly forecasted, the production estimates will also become misleading and erroneous.
As production will depend on planned sales quantity, the number of unit sales estimated in the sales budget is the fundamental point for determining the number of units to be produced in the factory. That is why the unit sales data from the sales budget feeds directly into the production budget, which is then used to generate direct materials and direct labor budgets. The sales budget is also used to give managers a general idea of the size of operations when putting together the overhead budget and the selling and administrative expenses budget. Moreover, the total sales value in rupees listed in the sales budget is carried forward to the master budget’s sales line item. Thus, if the sales budget is unreliable or faulty, all the other budgets that use it as a source of information will be misleading too.
It is based on the expected sales only that a company plans its inventory, level of production, purchases of materials, required manpower, finances, and other resources. If sales figures are estimated unreasonably high, then extra-purchases of materials and other resources procured in quantities more than required to match up with such sales would lead to wastage of the company’s money. On the flip side, if sales are predicted very low, then the company might face a shortage of materials and manpower that would result in sales opportunities being lost. (Source)
How to make a sales budget?
A sales budget should usually be prepared by someone having a good amount of experience. One can take the assistance of a sales manager and/or market research personnel.
The data in the revenue budget is gathered from various sources. The majority of the information for existing products comes from those who deal with them on a daily basis. The marketing manager provides information about sales promotions, which can influence the timing and volume of expected sales. Engineering and marketing managers can also provide information on the launch dates of new products as well as product retirement dates of old deliverables. The company’s sales of any divisions or product lines that the company expects to terminate or sell during the budget period can also be used by the chief executive officer to revise sales figures.
Steps to prepare a sales budget
1. Decide a period of sales budget
This budget is normally reported in a monthly or quarterly format. Reporting of sales information annually can become too aggregated and, therefore, might offer little actionable details.
2. Collect previous sales data
While preparing a sales budget, an accountant should use historical data of the products sold (from past financial records) and make projections based upon consumer surveys, population figures, and other reliable information to estimate the sales budget.
3. Gather information on market trends and other factors influencing sales
These factors could be:
- Backlog of unfulfilled sales orders
- Planned advertising and promotion
- Expected industry and general economic conditions
- Productive capacity
- Projected pricing
- Findings of market research studies
- The location of the market, i.e., domestic or international
Past sales volumes are often used as a starting point when estimating the quantity of sales for each product. Such amounts are modified (increased or decreased) in the light of factors that are expected to affect future sales. For example, if a company plans to spend a substantial amount on advertising and promotion that is likely to boost future sales, it would accordingly increase sales volumes of the past year.
4. Prepare sales forecast
The next step in creating a sales budget is to forecast as accurately as possible the sales that will occur during the budget span.
Once an estimate of sales volume has been obtained, the expected sales revenue can be calculated by multiplying the volume by the expected unit sales price.
If any sales discounts or sales returns are anticipated, then such items are included in the budget as well.
Factors to be considered in preparing sales budget
Sales predictions are influenced by a number of external as well as internal variables. External influences could be general market conditions, government policies, etc. Internal factors may consist of sales prices, sales trends, new products or services, etc.
When a sales budget is being prepared, some factors that must be considered include:
1. Past sales figures and trends
The company’s previous revenues over a given time frame play a major role in deciding potential sales possibilities.
2. Plant capacity or productive capacity
While preparing a sales forecast, the maximum manufacturing capacity of the company’s plant and/or any probable extension in facilities should be borne in mind. The sales figures should not be unrealistically high that they go outside the scope of production capacities.
3. Availability of material and supply
The quantum of resources available with a company has a direct impact on the sales that it can make.
4. Anticipation of new customer requirements/ New product needs
The target customers, which may be an industry or trade or a segment or community of the general public, etc., can have new and changing demands. And if a company is planning to launch new products soon, the budget should account for the anticipated rise in sales as well as the additional revenue.
5. Relative product profitability
A company should analyse the product portfolio – that shows the number of products offered to customers and their popularity amongst the target customers. Each product’s market share and its effect on the overall market can be important in making the sales budget. Popular products tend to offer larger sales.
6. Nature and degree of competition in the market/ Competitors’ strategies
The market share of competitor’s products and their impact on the company’s sales is also an important factor to consider. The arrival of new competitors and a sudden rise in competition can have a direct impact on a company’s product sales. This would have an impact on the budget.
7. Changes in consumer tastes and preferences
Changes in consumer tastes and preferences can cause demand for a product to shift. For instance, consumers can switch from processed foods to healthy raw foods as a result of increased health awareness. This would have an effect on the revenue budgets of companies supplying processed foods.
8. Seasonal fluctuations in sales
Festivals, weekends, weddings, and other events may have an effect on retail sales and revenue.
9. The expenditure on promotion and its effect on sales/ Planned advertising and promotion
The effectiveness and impact of current marketing policies on the existing sales volume and value must be looked into before preparing the sales budget. Various changes in distribution methods or promotional techniques can have a direct impact. If a product is well marketed by advertising, coupons, discounts, and other means, its future sales are potentially increased, and therefore the sales budget is influenced.
Sales budget format
A revenue forecast must be prepared both in terms of quantity and money, distinguishing between products, periods, and areas of sales.
It may be prepared under the following classification or combination of classifications:
1. Products or groups of products
2. Areas, towns, salesmen, and agents
3. Types of customers, for example (i) Government, (ii) Export, (iii) Home sales, (iv) Retail depots
4. Period – months, weeks, etc.
An illustrative format of a sales budget is as under:
Let’s assume that sales figures of ABC Company for the year 2020 were:
|Product A||Product B|
|Sales (in units):|
|Selling price per unit||Rs. 240||Rs. 500|
Targets for 2021 have been fixed by the company on the basis of market trends and plant capacities:
|Product A||Product B|
|Sales quantity increase (decrease)||-20%||25%|
|Selling price increase (decrease)||25%||-20%|
Adequate market studies revealed that Product A is under-priced and if its unit price is increased, there will be a fall in its demand. Similarly, Product B is over-priced and if its unit price is decreased, it is likely to find more demand in the market. The company’s management agreed to the aforesaid price and quantity changes.
Sales area X, Y, and Z respectively produce 10%, 20%, 70% of Product ‘A’ sales and 70%, 20%, and 10% of Product ‘B’ sales.
Now, the sales budget for 2021 will be prepared in the following manner:
Sales Budget (in Total) for the year 2021
|Product A||Product B|
|Product/Period||Units (20% decrease)||Rate Rs. (25% increase)||Amount -Rs.||Units (25% increase)||Rate Rs. (20% decrease)||Amount -Rs.|
Sales Budget (Area-wise) for the year 2021
|Product & Area/Period||Product A||Product B|
|Area X – Rs.||Area Y – Rs.||Area Z – Rs.||Total||Area X – Rs.||Area Y – Rs.||Area Z – Rs.||Total|
Another example of a sales forecast:
For the year ending March, 20…
|Particulars||Qty – Units||Selling price per unit (Rs.)||Total Sales Value (Rs.)|
A company’s profitability mostly depends upon its ability to market its products to consumers. In today’s competitive world, it is indispensable to determine the demand for a product even before it is manufactured. A sales budget plays an important role in figuring out the sales likely to be made by a business. It also facilitates the ascertainment of profits.
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