Sales Budget Definition
Sales Budget is prepared to forecast the quantity which the entity expects to sell and the amount of revenue that can be generated from the sale. Of such expected quantity in the future period, which 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;
Components
#1 – Sales Quantity
Considering the demand for the product in the past trend, the management should forecast the quantity that they expect to sell to the consumers in the upcoming period. It can be prepared for a month, quarter, or a 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, and the expenses may include expected raw material cost, labor cost, salary expenses, sales expenses, and other expenses that the management expects to incur shortly.
#4 – Collection of Cash
Estimation of collection of cash is also a part of this budget as there is a different type 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 amount that is expected to be recovered in the coming period.
Sales Budget Example
ABC ltd plans for the production of 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 3 and $ 8,000 in quarter 4, where the selling price of for first two quarters is estimated to be $ 6 and for quarter 3 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 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 | |||||
| Particulars | Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | |
| A | Sales Unit Forecasted | $5,000.00 | $6,000.00 | $7,000.00 | $8,000.00 |
| B | Price per Unit | $6.00 | $6.00 | $7.00 | $7.00 |
| C | Total Gross Sales (A*B) | $30,000.00 | $36,000.00 | $49,000.00 | $56,000.00 |
| D | Sales Discount and Allowance (2% of Gross Sales) | $600.00 | $720.00 | $980.00 | $1,120.00 |
| E | Total Net Sales (C-D) | $29,400.00 | $35,280.00 | $48,020.00 | $54,880.00 |
Thus the above example shows sales forecasted by the company for the year under consideration in both the units as well as value with the help of the information available as the inputs from the various sources.
Advantages
- It acts as a guide for the organization as it provides the target that the management expects to achieve in the coming period, and the set targets motivate employees to work hard towards the achievement of prescribed goals.
- With the budget figure, the employees know well in advance the limit of expenditure, which they could incur on specific activities in a pre-determined period, thereby keeping the control on the business expenses and getting the desired results set by the management for the business.
- It is considered to be the yardstick of measurement of business sales performance and progress, thereby assessing the areas where the business needs growth and improvement for increasing the earning potential.
- It helps allocate the business resources into different goods and services and sales territories wisely so that the funds are utilized at its optimal level for achieving the organization’s objective.
Disadvantages
- Preparation of sales budget is a time-consuming process which needs a lot of management time and efforts
- It is based wholly on the management judgment and estimations, so the useful and accurate forecast of the sales and expense is generally not possible in today’s scenario and this competitive and sometimes unpredictable market.
- 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.
- For the 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 the preparation of the budget.
Important Points
- The business that has existed for the long years and has past historical data can be prepare sales budget effectively and accurately as compared to the business that is new as they can only prepare a budget using the sales forecasting strategies and not by following the past trend.
- 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 as compared to large businesses.
Conclusion
Sales budget forecast the sales and expenses of the business, giving them targets to the employees of the business to achieve the desired output with minimum expenses, and it is generally prepared by all the organization whether small or large, new or old. Different organizations adopt different strategies and policies for preparing sales budget depending upon the nature of 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, and competition in the market, etc.
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