A sales budget is management’s estimation of sales for a future financial period. A company uses sales budgets in order to set department goals, estimate earnings and forecast production requirements. The sales budget affects both other operating budgets and the overall master budget of the company.
What Are The Basics Of Assembling A Sales Budget?
As a sales budget is an estimation of sales for a future accounting period these are often divided into first, second, third as well as fourth fiscal quarter estimates. The absolutely essential components of a sales budget are estimated unit sales, price per unit in addition to the allowance for discounts and returns.
- Estimated unit sales multiplied by the price per unit equals budgeted gross sales.
- Budgeted gross sales less estimated sales discounts and returns is the budgeted net sales for the period.
How To Create a Sales Budget
It’s notoriously difficult to forecast sales and estimate demand. To create a sales budget, managers consider market factors, current economic conditions and business-specific production capacity. To create a realistic sales budget, management needs to consult with sales staff at a variety of levels in different positions. Sales representatives often have key insights into customer concerns and trends, which can help management predict future performance.
What Is Involved In Planning?
When planning, the sales budget provides the sales managers with a platform to determine the necessary methods to achieve the objectives of a sales forecast plan. The managers are often asked to provide an itemised list of every cost of the sales programme that would allow the sales team to meet their objectives. This task is often referred to as the “objective and task approach”:
- Defining objectives – The sales managers first define the objectives their sales teams should achieve based on the predicted sales. This would have been determined first in the sales forecast.
- Determining key activities – With a clear and planned list of objectives, sales managers identify the activities or tasks that will help their sales teams achieve the proposed objectives.
- Estimating the cost of key expenses – Sales managers calculate the total cost of each key expense and subtract the total from the gross margin to get the contribution margin.
Coordination Of The Sales Budget Is Needed
Developing a budget allows sales managers to integrate various elements of the marketing mix (price, product, place and production) so that the elements are coordinated and achieve the objectives set out within the sales forecast.
How the sales budget affects each department is different in every organisation. However, generally it affects the production budget, sales department budget and administrative budgets:
- Production – This includes total cost of products being produced.
- Sales department budget – Costs involved in conducting sales activities.
- Administrative budgets – Costs of activities not directly related to selling g but to HR management and finance.
What Is The Goal Of A Sales Budget?
The goal of a sales budget is to control or guide the actions of the sales managers to variables that arise owing to the sales budget. The budgets are seen as a yardstick against which the team’s results are measured. By analysing sales budgets for variance, sales managers can identify areas of expenditure that can be improved through corrective action.
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