A sales budget is the projected number of units a company anticipates selling in a set period of time and the revenue it could earn. Typically, organizations measure this either on a monthly, quarterly or yearly basis. When predicting a sales budget, companies consider factors such as previous sales patterns, activities of competitors and the current or expected economic conditions.
Important
Sales budgets are important tools to help businesses estimate their overall performance and how much revenue they may make from a certain product. It helps companies forecast sales and maximize the utilization of their resources. A sales budget also serves as a planning tool for organizations to use to set specific standards for achievements. For instance, a company could take its annual sales budget of Rs. 1,00,000 and divide it by four to determine the team’s quarterly goal of Rs. 2,00,00
Organizations can determine if their business is successful by examining how closely they reach their target. Sales managers use these to determine corrective actions to take to be more efficient. Other benefits of calculating a sales budget include:
- Building actionable strategies to reach sales goals
- Determining overhead costs
- Improving cash flow management
- Streamlining business processes
Components:
Sales Revenue
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.
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.
Price per unit
The sales budget includes the most recent price for a company’s product or service. It focuses on one particular item or unit. If companies anticipate a fluctuation in prices throughout their budget period, then they include that here as well.
Sales forecast
Through looking at past data, an organization creates a sales forecast based on past trends. This is the number of units they expect to sell during their budget period. Sales forecasts can look at the amount they anticipate an individual to sell, a team or the overall company.
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.
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 final element of the sales budget is the total revenue. You can calculate this by multiplying the sales forecast by the price per unit. The total revenue is the company’s sales budget.
Methods:
Percentage of Sales Method
Most companies set their sales budget as a specified percentage of sales (either current or anticipated). Mass selling goods and companies dominated by finance are major users of this method.
Price per unit
The sales budget includes the most recent price for a company’s product or service. It focuses on one particular item or unit. If companies anticipate a fluctuation in prices throughout their budget period, then they include that here as well.
Affordable Method
Many companies set the promotion budget at what they think the company can afford. This method is used by firms dealing with capital industrial goods. Also, companies having a small size of operation make use of this meth
Competitors Parity Method
This method is used by large size companies facing tough competition. It presumes knowledge of competitors’ activities and resource allocation.
Zero Base Budgeting
A process in which sales budget for each year is initiated from zero base thus justifying all expenditures and discarding all conventions and rules of thumb. Its limitation is that it is a very elaborate and time-consuming process. In practice, companies use a combination of these methods.
Objective and Task Method
This method calls upon marketers to develop their budgets by identifying the objectives of the sales function and then ascertaining the selling and related tasks to achieve objectives. Later the cost of each task activity is calculated to arrive at the total budget. Adjustment to task or budgets can be made.