Updated July 11, 2023
Definition of Sales Budget
A sales budget (SB) can be defined as a budget that is prepared to forecast or estimate future sales revenue, taking into consideration the units of sales in the future and the selling price of the product or service according to the demand for specific goods in the market and other market conditions like competition, availability, etc. using better utilization of business resources, lesser expenses, lesser wastage of material, employee performances, etc.
Explanation
Like the other budgets the company prepares, the SB prepares to forecast and estimate the company’s future sales revenue. The salespeople and the marketing team are crucial in preparing the sales budget. The SB gives the company’s employees a better understanding of their targets, thus staying motivated to achieve the same.
Purpose of Sales Budget
The SB’s most important purpose is forecasting the company’s future sales. The company knows how many sales units it has to produce and how many expenses it has to incur. With the help of the SB, the other budgets of the company are prepared, like the production budget, expenses budget, etc.
Sales Budget Process
- Generally, the bottom-up planning method uses to determine the SB.
- Every salesperson contributes their budget, which they collate and deposit with the manager. The manager then sends their budget to the region in charge, who passes it on to every senior level until the final SB is prepared.
- The company’s top management implements the necessary changes in the SB and sends them to the different departments through a process known as top-down communication.
Example of Sales Budget
Let’s Consider the company ABC Ltd. It is in the business of manufacturing boxes. It made its budget for the next year ended on December 2002. It has forecasted its sales for the next year for the Q1, Q2, Q3 & Q4 are $10,000, $8,000, $6,000 & $9,000 respectively. The selling price for Q1, Q2, Q3& Q4 would be $7, $7, $8 & $8, respectively.
The company allowed the sales discount of 5% on gross sales for the entire year quarter-wise.
Its SB will prepare as follows:
Sales Budget of ABC LTD
For the year ended December 2001.
| Sr. No. | Particulars | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 |
| A) | Sales Unit | $10,000 | $8,000 | $6,000 | $9,000 |
| B) | Sales price per unit | $7 | $7 | $8 | $8 |
| C) | Total sales (A*B) | $70,000 | $56,000 | $48,000 | $72,000 |
| D) | Sales Discount @5% on gross sales | $3,500 | $2,800 | $2,400 | $3,600 |
| E) | Total Net Sales(C-D) | $66,500 | $53,200 | $45,600 | $68,400 |
Factors Affecting Sales Budget
The following factors affect the SB:
- Internal Factors: The internal factors are those factors that are present within the organization like the number of employees, the ability and the performance of employees, the price of the sales, the volume of the sales, availability of the product, the price of the product, management strategies, etc.
- External Factors: External factors are those outside the organization, like competition in the market, The types of customers, the Customer’s purchasing power, Seasonal factors, legal environment, Economy, etc.
Need for Sales Budget
The organization needs to prepare the SB to answer questions like how many units of the product should produce, how many expenses should be incurred, how many employees should allocate, and how many resources should give for the particular processes.
Importance of Sales Budget
It is essential in the following area:
- Budgeting of the other Departments: Generally, the budget required to be prepared by the other departments depends on the Sales budget. Once it is ready, different budgets, like production and expenses, can be prepared.
- Growth & Expansion: The SB gives the sales targets to be achieved by the company’s employees. Hence, the employees stay motivated and work in a complex, inefficient, and effective manner to achieve the targets.
- Performance Evaluation: The sales budget evaluates the organization’s performance. As the target sales are already known at the beginning of the year, the company can determine its performance by referring to the actual sales it has achieved at the year-end.
Advantages
- It gives the idea of the target sales for the organization’s employees. Due to this, the company’s employees stay motivated and work hard to achieve the desired sales target.
- It also gives the idea to the employees of the company about the expenditure they can incur. They can provide the priorities to the different expenses and ignore those irrelevant. Hence, there can be efficient and effective control of business expenses.
- It gives the performance measurement of the organization’s business. Hence the organization can view its growth and the area where it needs improvement.
- With the help of the sales budget, the business’s resources are allocated efficiently and optimally utilized.
Disadvantages
- A lot of time and the management’s efforts requires to prepare the sales budget. Hence, it proved to be a time-consuming activity.
- The preparation of the sales budget is based on the management’s judgment, which is subjective and can differ from person to person. Hence, it does not give a realistic view of future sales and related expenses.
- Generally, it prepares considering the past trends of the organization. The newly formed company did not have sales in the past, so scheduling a sales budget became difficult for the newly formed company.
Conclusion
It is prepared by every organization irrespective of the size of the organization and age, whether small, large, old, or new. This budget is prepared to estimate the sales revenue and the expenses after considering the sales discount of the business. It helps the company employees achieve the desired sales at the minimum costs. There are various strategies by which the sales budget of the business is prepared using past trends and the nature of the company. The nature of the business, market conditions, market competition, etc., are some factors considered when preparing the sales budget.
Recommended Articles
This is a guide to Sales Budget. Here we discuss the introduction, factors affecting sales budget, and advantages and disadvantages. You may also have a look at the following articles to learn more –
