Budgeting refers to a process performed by companies to create a spending plan. However, it does not cover areas where companies spend resources only.
Budgeting also applies to income. Once companies estimate their future sales, they can create a plan to spend accordingly. Usually, budgeting involves several steps that companies perform after regular intervals.
Budgeting allows companies to set a path for future operations. It also enables them to create a standard for future activity.
When they get the results of their actual performance, companies can compare it to the budget. Consequently, they can understand if they have performed according to the plan. The budgeting process falls under managerial accounting. It involves various managers.
Companies prepare a budget for a defined future period. However, most companies create various budgets, which they combine under a master budget. They may require each manager to budget for their respective department or function.
Based on that, they may create different types of budgets. One of those types includes a sales budget. It has a significant purpose in managerial accounting.
What is a Sales Budget?
A sales budget is a financial plan for future income by selling products or services. It shows the estimated number of units a company expects to sell. Usually, companies prepare a sales budget for the same period as they create other plans. Based on the estimated units, companies can also calculate the revenues they can earn.
A sales budget allows companies to estimate how many products they will sell. Companies may consider various factors when creating that budget.
For example, it may include sales trends, current or expected economic conditions, industry activity, etc. Based on them, companies predict the revenues they generate for a period. This budget sets the base for other financial plans.
A sales budget includes a forecast of the expected units a company intended to sell over a given period. On top of that, it also links those units to revenues through a standard price. While this price may change in the future, the sales budget still uses it to establish a benchmark.
Once prepared, companies can use this budget in various areas. For example, it can be crucial in preparing an income statement budget or forecast.
Sales budgeting is a highly crucial area in any company. Therefore, companies prepare these budgets with substantial care. The sales budgeting process may differ from one company to another. In most cases, it involves similar steps with different approaches.
Sales budgets are also crucial in setting the expectations for various managers. While it primarily concerns the sales and marketing department, it can also impact other areas.
What is the Purpose of Sales Budgeting?
The purpose of sales budgeting may differ from one company to another. However, it involves similar benefits throughout all areas. Sales budgeting covers all the purposes that companies expect to achieve from overall budgeting.
Nonetheless, it only concerns areas where revenues occur within a company. Overall, the purpose of sales budgeting includes the following points.
1) Sets sale goals
One of the purposes of sales budgeting includes setting sales goals. As mentioned above, this process involves establishing the number of units companies expect to sell. This expectation creates goals for the sales and marketing department.
On top of that, it also impacts other areas. Based on those units, companies can also set their production goals.
2) Helps manage expenses
Sales budgeting does not involve creating cost budgets. However, it plays a crucial role in helping companies manage their expenses. By setting sale goals, sales budgeting provides a base for the expenses that companies must incur.
Therefore, it plays a crucial role in establishing the benchmark for those expenses. Every department plays a significant role in helping reach expectations in the sales budget.
3) Promotes coordination between departments
Usually, sales relate to the marketing and sales department. However, they only perform the activities of promoting and delivering those items to customers. For most companies, the sales budget sets the base for other budgets.
Therefore, it establishes the expectations from each department in achieving the sales goal. This way, it promotes coordination between those departments to maximize efficiency.
4) Serves as a control tool
Sales budgeting allows companies to set the expectation for performance in sales activities. Through sales budgets, companies can understand how to perform to achieve sales goals. Companies can compare their actual performance in various areas to the budgeted sales.
Based on that, they can regulate areas where processes are inefficient. Therefore, sales budgeting helps companies create a tool for controlling actual performance.
5) Sets production expectations
Sales budgeting forecasts the number of units companies expect to sell during a period. However, achieving those sales may not be possible without coordinating production activities.
Therefore, sales budgeting allows companies to set the expectations for the manufacturing process. Based on that, they can also decide on the best allocation of resources between several activities.
6) Helps estimate cash flows
Sales budgeting also allows companies to estimate the cash flows associated with the sales process. It helps management ensure the amount of cash from sales activities over the budgeted period.
Consequently, they can use these cash flows in other budgets to create plans for the future. Although sales budgeting only covers cash inflows, it also impacts cash outflows through further budgeting.
7) Develops core strategies
Overall, sales budgeting helps companies develop their core strategies. Without a sales budget, companies can’t build the plans necessary to generate profits.
Usually, companies prepare the sales budget before others. Since it sets the base for further budgeting, sales budgeting is crucial. Most companies use it to devise other essential plans to operate and generate profits.
How to Prepare a Sales Budget?
Companies can prepare a sales budget in several steps. Each of these steps dictates the activities with the upcoming stages. Overall, companies prepare sales budgets in the following way.
Set a period
The first step to creating a sales budget is to set the time frame. Usually, this timeframe includes the upcoming period. For most companies, it can be a year or quarter. Companies may also prepare sales budgets for shorter periods.
Establish stock and prices
Once companies know the timeframe, they must establish their stock and prices. It is crucial to understand how many units of products companies have available for sale at the time.
On top of that, companies must determine if they will charge the same prices or change them.
Consider past sales data
Companies must also consider data from the prior period to check if it matches the current sales budget period.
If so, they can roll that budget over and make minimum changes to it to create a new one. Companies can also consider previous data for a similar period.
Compare data with industry
Companies can also compare their sales budget with the industry to ensure it matches the average.
Alternatively, they can also consider the sales budgets of competitors. This way, companies can get better information on devising a new budget.
Consider customer and marketing team needs
Companies must also consider the needs of their customers when devising a sales budget. This way, they can get valuable feedback to incorporate into that budget. On top of that, the marketing team can also provide valuable insights on the matter.
Consider market trends
When preparing a sales budget, companies must also consider market trends. If they expect the sales to go up in the future, they can also adjust their budget accordingly. This process can significantly help in predicting future sales.
Create sales budget
After considering the above steps, companies can prepare a sales budget. Each of the above stages plays a crucial role in the sales budgeting process.
Therefore, companies must perform them carefully to ensure a reliable and realistic sales budget.
A sales budget is a financial plan for sales during a specific period in the future. Companies prepare these budgets to establish how many units of products they expect to sell.
Based on that, they can also estimate their revenues. Sales budgeting has various purposes, as listed above. Companies can prepare a sales budget in several stages.