Sales Budget Definition
Sales Budget is prepared to forecast the quantity which the business entity expects to sale and the amount of revenue that can be generated from 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 prevailing market demands, and past trends.
Components of Sales Budget
#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. This can be prepared for a month, quarter or a year as per the management wish and requirement.
#2 – Sales Revenue in Dollars
The second thing that the management should consider in the sales budget 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 important part of the sales budget. The estimated expenses vary with the nature of 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 in near future.
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#4 – Collection of Cash
Estimation of collection of cash is also a part of the sales 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 on 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 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 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 sales budget of ABC ltd for the year ended on December 31, 2020
Thus the above sales budget 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
- This 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 is helpful in allocating the business resources into different goods and services and sales territories wisely so that the resources 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
- This is based wholly on the management judgment and estimations so the effective and accurate forecast of the sales and expense is generally not possible in today’s scenario and in this competitive and sometimes unpredictable market.
- Different persons have different opinions so it is not necessary that all the employees in the organization are willing to accept the sales budget as prepared by the top-level management.
- For the newly established company, it is very difficult to prepare the sales budget as past sales levels and trends are not available that is the most important 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 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 the 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 sales budget is generally prepared by all the organization whether small or large, new or old but different organizations adopt different strategies and policies for preparing sales budget depending upon the nature of their business and industry but the past sales data is the key base used for the preparation of sales budget apart from the general economic conditions, market research, political scenario and competition in the market, etc.
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