Sales Budget Definition Examples What Is A Sales Budget

Sales Budget Definition

A sales budget is prepared to forecast the quantity the entity expects to sell and the revenue 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

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#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 revenueSales RevenueSales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly or monthly as the case may be in the business entity’s income statement/profit & loss account.read more (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 costLabor CostCost of labor is the remuneration paid in the form of wages and salaries to the employees. The allowances are sub-divided broadly into two categories- direct labor involved in the manufacturing process and indirect labor pertaining to all other processes.read more, 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.

Sales Budget Example

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 of for 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 salesGross SalesGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. read more 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

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 the inputs from the various sources.

Advantages

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.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 expensesThe Business ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more and getting the desired results set by the management for the business.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.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.

Disadvantages

Preparation of a sales budget is time-consuming and needs a lot of management time and effort.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.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 preparing the budget.

Important Points

A 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 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 than large businesses.

Conclusion

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 upon 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.