Sales Budget

A sales budget is prepared to forecast the quantity the entity expects to sell and the revenue generated from the sale. Such expected quantity in the future period is based on the management's judgment related to the competition in the market, economic conditions, production capacity, consumer current market demands, and past trends.

The preparation of the sales budget in the small business is more cumbersome as they have fewer resources available for their business and can experience more market fluctuations than large businesses.

The sales budget forecasts the sales and expenses of the business, giving targets to the business’s employees to achieve the desired output with minimum expenses, and it is generally prepared by all the organization, whether small or large, new or old. Of course, different organizations adopt different strategies and policies for preparing sales budgets depending on their business and industry. Still, the past sales data is the crucial base used for the preparation, apart from the general economic conditions, market research, political scenario, competition, etc.

Any business that has existed for long years and has past historical data can prepare a sales budget effectively and accurately compared to the new business. They can only prepare a budget using sales forecasting strategies and not by following the past trend.

When businesses prepare the sales budget, it serves multiple purposes. Some of them have been listed below:

• It helps businesses have an idea about how much sales to expect over a particular period by leveraging resources. Hence, they can set their achievable limits accordingly.
• The sales budget helps other departments to plan the utilization of resources to achieve the expected sales targets within the specified time frame.

It sets a goal or target for different teams, contributing to the sale of the products and items. As a result, all the departments strive to make more sales.

The elements or components that play a key role in the sales budget preparation include:

#1 - Sales Quantity

Considering the demand for the product in the past trend, the management should forecast the quantity they expect to sell to the consumers in the upcoming period. Therefore, it can be prepared for a month, quarter, or year as per the management's wish and requirement.

#2 - Sales Revenue in Dollars

The second thing that the management should consider is the amount of sales revenue (in dollars) that the management thinks of earning from the expected sale quantity.

#3 - Expenses

The expenses are also considered to be an essential part of this budget. The estimated expenses vary with the nature of the business. The expenses may include expected raw material costs, labor cost, salary expenses, sales expenses, and other expenses that the management expects to incur shortly.

#4 - Collection of Cash

Estimation of cash collection is also a part of this budget as there are different types of customers in the business where some pay in cash while others choose the option of credit purchase. So the management should estimate, using the past recovery trend, the expected amount to be recovered in the coming period.

The sales budget is calculated using a very simple equation given below:

Sales Budget = Sales Volume * Price

Where,

• Sales volume refers to the total units of the products or items in question
• Price is the selling price of each unit

Let us consider the following example to understand the sales budget meaning properly:

ABC Ltd plans to produce the bottles in the next year ending in December 2020. It forecasted sales to be $ 5,000 in quarter 1, $ 6,000 in quarter 2, $ 7,000 in quarter three, and $ 8,000 in quarter 4, where the selling price for the first two quarters is estimated to be $ 6 and for quarter three and for quarter 4 to be $ 7 by the manager of the company.

Also, the sales discount and allowance percentage will be 2 % of gross sales for all the quarters.

Prepare the sales budget of the company for the year ending in 2020.

Solution:

Following is the format of sales budget of ABC Ltd for the year ended on December 31, 2020

Sales Budget of ABC LTD

For the Year Ended December 31, 2020

Thus the above example shows sales forecasted by the company for the year under consideration in both the units and value with the help of the information available as inputs from various sources.

The sales budget process involves a series of steps when it comes to preparing it for different businesses. To make the budget related to sales accurate and reliable, it is important to abide by the following guidelines:

Select Period

The first thing the businesses do is decide on the period for which the budget needs to be prepared. It can be monthly, quarterly, or annually. While the annual budget offers an overview of the sales revenue and overheads, the monthly and quarterly budget helps businesses get a clearer picture of the budget.

Include Records

The next step is to collect all inventory and record the sales prices of each and every product per their unit. The businesses must include the upcoming products they know of over that period and also consider the expected changes in the prices of the items.

Consider Historical Data

Studying historical data while preparing the budget for sales can also be of great help. At times, the budget to be prepared around a month of this year could align with that of the same month of the previous year. This helps figure out if that particular period is a peak period or normal or encourages below-average sales.

Talking to Sales Representatives & Customers

Talking to sales representatives and customers helps assess how interested they are in a particular product or item. Their likelihood of buying the products helps estimate the prospective sales figure for the period.

Other Considerations

Besides the above important parameters to sales budget preparation, one can also consider taking into account the current market trend, talking to sales representatives, considering industry benchmarks, etc.

Preparation of Sales Budget

Once each and every step is followed to obtain the figures and assess the possibilities, the sales budget is created.

When the sales budget is prepared, it helps companies get an estimate of the sales revenue as well as sales overheads. As a result, the entities get aware of the total revenue figures. Thus, businesses have an opportunity to examine these figures and implement strategies to keep up the pace or improve and become better with time.

Let us have a look at some of the benefits of preparing a sales budget:

1. It guides the organization as it provides the target that the management expects to achieve in the coming period. The set targets motivate employees to work hard towards achieving prescribed goals.
2. With the budget figure, the employees know well in advance the limit of expenditure, which they could incur on specific activities in a predetermined period, thereby keeping the control on the business expenses and getting the desired results set by the management for the business.
3. It is considered the yardstick of measurement of business sales performance and progress, thereby assessing the areas where the business needs growth and improvement to increase the earning potential.
4. It helps allocate the business resources into different goods and services and sales territories wisely so that the funds are utilized at their optimal level for achieving the organization's objective.

The sales budget preparation, however, has some limitations too, which users must be aware of. Below is a list of some demerits of this process:

1. Preparation of a sales budget is time-consuming and needs a lot of management time and effort.
2. It is based wholly on management judgment and estimations, so a useful and accurate forecast of sales and expenses is generally impossible in today's scenario and this competitive and unpredictable market.
3. Different persons have different opinions, so not all the employees in the organization need to be willing to accept the budget as prepared by the top-level management.
4. For a newly established company, it is tough to prepare the sales budget as past sales levels and trends are not available, which is the essential base for preparing the budget.

A business prepared multiple budgets to keep track of all its processes. Of them are sales and production budgets, which are vital for the businesses for the preparation of their master budget.

Let us check out the differences between the two terms:

• The sales budget identifies the sales volume and the prices of the items in question, while the production budget uses the data from the sales budget for preparation.
• Both share a common information, i.e., the number of items sold. While the sales budget uses this to derive its future income, the production budget uses it to identify production operations.
• The business begins with preparing the sales budget, which accounts for the expected sales, and is the backbone of any business. The other budgets, including the production budget, uses the data in the former for their preparation.

This article has been a guide to what is Sales Budget. We explain its example, formula, how to prepare, vs production budget, objectives, advantages & disadvantages. You can learn more about excel modeling from the following articles –

• Traditional Budgeting Definition
• What is Budgetary Slack?
• What is Capital Budgeting?
• Master Budget
• High-Low Method Formula