Table of Contents Hide
- What is a Sales Budget?
- A Sales Budget’s Components
- Sales Budgeting Methods
- Step-by-step Procedure for Developing a Sales Budget
- Step #1 – Select a Time Period
- Step #2 – Record Your Inventory and Prices
- Step #3 – Review Your Past Sales Data
- Step #4 – Compare Your Information With the Current Industry
- Step #5 – Contact Your Sales Representatives and Customers
- Step #6 – Market Trends and Current Events Factor
- Step #7. Develop Your Budget
- Sales Budget Example
- The Importance of a Sales Budget
- What Is the Difference Between a Sales Budget and a Forecast?
- Sales Budget FAQs
- Why sales budget is prepared first?
- What are the six types of budgets?
A sales budget differs from sales forecasting, which is the process of forecasting future sales revenue. A solid sales budget, on the other hand, can be used to inform a sales forecast. A sales budget differs from a sales expense budget in that it focuses on company expenses over a specific time period. One of the importance of a sales budget is that they make it easier to develop concrete sales plans and greatly simplifies sales management. Overall, the sales budget (and the process of creating it) serves as a guide, directing your company and its sales team for the remainder of the month, quarter, and year.
Here’s an explanation of what a sales budget is, the difference between a sales budget and a forecast, and the step-by-step process of budgeting sales. We’ll also see an example of a sales budget.
What is a Sales Budget?
A sales budget is the estimated number of units and revenue that a company expects to sell in a given time period. Organizations typically measure this on a monthly, quarterly, or yearly basis. Companies consider previous sales patterns, competitor activity, and current or expected economic conditions when forecasting a sales budget.
A Sales Budget’s Components
A plethora of spreadsheets is required for all types of corporate planning. Small businesses, like large corporations, will use and collaborate on a variety of spreadsheets. Finally, planning spreadsheets will all be linked to the three basic financial statements that a business uses to analyze and plan its operations:
- An income statement shows your company’s profit and loss over a specific time period.
- A balance sheet summarizes your company’s assets, liabilities, and shareholder equity (if applicable).
- A cash flow statement shows you how much money is coming in and going out of your business over a specific time period.
A sales forecast is frequently used to construct a company’s projected income statement. Simple sales forecasts that focus solely on projected unit sales are possible, as are more comprehensive forecasts that deviate from the income statement and include variable planning. These could include direct costs of goods sold as well as indirect costs of marketing campaigns.
Forecasts and budgets for sales can take many different forms and serve many different purposes.
A spreadsheet template or model designed to meet the needs of a sales forecast is the best starting point for any sales forecast or budget. You can find many free and paid versions of these spreadsheet templates online. Most can be integrated into Google Sheets or Microsoft Excel, so find one that works for you.
Spreadsheet templates can be found in a variety of places, including:
- Microsoft Office Templates
Sales Budgeting Methods
A sales budget can be prepared using a variety of techniques.
The following are some popular methods for creating a sales budget:
#1. Affordable Budgeting
This is a method commonly used by businesses dealing with industrial goods. This judgmental method is also used by firms that do not prioritize budgeting or have a small number of employees.
#2. Rule of Thumb
For example, a certain percentage of sales. The majority of users of this method are companies involved in mass sales of goods and companies dominated by the finance function.
#3. Competitive Method
Few companies whose products face tough competition and numerous challenges in selling and which require an effective marketing strategy to maintain profits use this method. So, using this method necessitates knowledge of how our competitor handles resource allocation.
Companies use a combination of the methods listed above. Budgeting approaches are refined over time based on past experiences. The state of sales and marketing assists the organization in determining the level of sophistication required in approaching sales budgeting.
Step-by-step Procedure for Developing a Sales Budget
There are seven fundamental steps to creating a sales budget.
Step #1 – Select a Time Period
First, you must select a budgeting period. This period is typically monthly, quarterly, or annual. Anything shorter or longer is either useless or inaccurate. What your company sells and requires will determine the time frame that you’ll select. If your products are consistent throughout the year, a monthly budget may be the best option. If your products change with the seasons, a quarterly budget may be more appropriate.
Step #2 – Record Your Inventory and Prices
To predict future sales, you must first know what your prices are and what products you have available—and whether or not they will change. Will you keep your prices the same? Bringing them up? Bringing them down? Will you be introducing new products or discontinuing existing ones? So, these questions will help you more accurately predict your expected sales.
Step #3 – Review Your Past Sales Data
Examine data from the previous period that corresponds to your current sales budget period. This not only simplifies but also improves the accuracy of your predictions. If you’re putting together a sales budget for August and the two previous Augusts show less than a 2-percent increase in sales, forecasting a 10-percent increase in sales for the upcoming August is probably not a good idea.
Step #4 – Compare Your Information With the Current Industry
It is critical to match your objectives to the current market and competition. You can gain perspective on where your sales goals fit and where they may need to adjust by comparing your sales data to that of other similar companies. The U.S. Bureau of Labor Statistics website allows you to view sales data from other businesses.
Data comparison can also be reassuring. You may be panicking because your sales fell in 2020, but the reality is that sales fell across the board in your industry. So some years are simply easier or more difficult in certain industries or products.
Step #5 – Contact Your Sales Representatives and Customers
Your sales reps and customers can both provide useful feedback to help you plan your sales budget. Because your sales reps are in close contact with your customers, they can provide you with more information about buyer expectations, disappointments, and desires. For example, sales representatives for a soap company will know if certain scents are popular with customers and should be invested in.
Of course, users of your product will have insights to share as well. In order to learn what your customers are thinking, feeling, and experiencing, solicit customer feedback. Communicating with your customers builds trust in your business and is an excellent social selling tool.
Step #6 – Market Trends and Current Events Factor
The market can be unpredictable at times. So, as the pandemic continues to have an impact on businesses, sales budgets for 2022 and 2023 must account for additional factors. How much shipping might you have to charge if in-store purchases remain low? Should you expect a drop in sales if your products are luxurious? Also, remember that even your most devoted customers can be affected by current events.
Step #7. Develop Your Budget
It is now time to create your budget. We’ll look at a monthly and annual sales budget example below, but if you’ve completed steps one through six, you should be in good shape to create an accurate, clear, and goal-focused sales budget.
Sales Budget Example
During the upcoming fiscal year, ABC Company intends to manufacture a wide budget of plastic pails, all of which fall into a single product category. Its sales projection is as follows:
ABC Corporation Budget for Sales For the Fiscal Year Ending December 31, 20XX
|Forecasted unit sales||5,500||6,000||7,000||8,000|
|x Price per unit||$10||$10||$11||$11|
|Total gross sales||$55,000||$60,000||$77,000||$88,000|
|– Sales discounts & allowances||$1,100||$1,200||$1,540||$1,760|
|= Total net sales||$53,900||$58,800||$75,460||$86,240|
According to ABC’s sales manager, increased demand in the second half of the year will allow it to raise its unit price from $10 to $11. Furthermore, the sales manager anticipates that the company’s historical sales discounts and allowances percentage of 2% of gross sales will be maintained throughout the budget period.
This sales budget example is oversimplified because it assumes the company only sells in one product category. In reality, this example could have been a detail page that was rolled up into the main budget and occupied a single line item.
What are the Factors Influencing the Sales Budget?
#1. Trends in Sales and Capacity
The sales trend over the last few years will help determine how much to produce that you can sell. Furthermore, an organization’s production and financial capacity will have a significant impact on the budget. The budget will be useless if the company is unable to produce or obtain enough units of the product to meet the sales forecast.
#2. New Product Introductions
If a company intends to launch new products soon, the budget should account for the expected increase in sales as well as the additional revenue generated.
#3. Seasonal Variations
Seasonal fluctuations also have an impact on a company’s budget. Festivals, weekends, weddings, and other events can have an impact on the sales and revenue of many products.
#4. Publicity and advertising
The amount a company decides to spend on advertising and publicity, as well as the offers and discounts it provides on its products, will have an impact on the budget. Furthermore, the selection of new distribution channels will have a direct impact on sales and the company’s budget.
#5. Price Variation
A company’s input prices may suddenly rise or fall due to uncontrollable external factors such as a natural disaster or a shortage of raw materials. This will have an impact on its product prices and sales, as well as its budget.
#6. Increasing Competition
The entry of new competitors and a sudden increase in competition can have a direct impact on a company’s product sales. So, this will have an effect on the budget.
#7. Policy Changes in the Government
A change in government policy or rules governing a specific product has an impact on its sales and budget. The government may change its policy to prohibit the sale of a specific product, such as tobacco or cigarettes. As a result, in such cases, the budget will completely fail.
#8. Consumer Demand Variations
Consumer tastes and preferences can cause changes in demand for a product. Because of rising health consciousness, consumers may shift their consumption of fried foods to healthy diet foods. This will have an impact on the sales budgets of fried food manufacturers.
#9. Economic Situations and Technological Advances
Economic conditions such as a recession or depression will have an impact on product sales and their budget. Furthermore, the introduction of new technology may significantly increase a company’s production capacity. As a result, sales will increase, affecting the company’s budget.
The Importance of a Sales Budget
#1. How Much Will Be Produced?
This budget provides answers to critical questions such as what and how much to produce. It also establishes a sales and revenue target for the team. This helps to keep the team motivated and working hard to meet the objectives. It also assists management in allocating scarce economic resources to planned goods, services, and territories.
#2. Overhead Estimation and Budget Preparation
The budget assists in estimating administrative and selling overhead costs. These are the costs that you must budget for in addition to the manufacturing costs. As a result, management can prepare budgets for administrative expenses, advertising and publicity, distribution expenses, recruitment, and the human resource department.
#3. Cash Flow Estimation
It assists management in determining how much cash to expect from sales activities during the budget period. This will assist them in keeping an eye on the company’s liquidity position.
#4. Control Measurement
It is critical for assessing the sales team’s performance. Sales figures are the foundation upon which all other departments rely. The management can continue to compare the actual sales figures to the budgeted figures. Thus, checking budget deviations is possible in time, and they can take action to fill the gap.
What Is the Difference Between a Sales Budget and a Forecast?
A sales budget and a sales forecast are two tools that are extremely similar. So much so that they are frequently misidentified as the same thing. However, it is critical to understand that they are indeed distinct and what those distinctions are.
The sales budget of your company is a quantified expectation of the sales numbers that will be achieved during a given period. One that summarizes the total revenue expected from all services or products sold. The sales budget will be created first. Alternatively, the sales forecast is established after the sales budget has been established and details what is expected to be sold during specific periods.
A more specific distinction between the two is that sales forecasts are frequently structured for shorter time periods, such as per week or month. A sales budget will consider long-term, annual figures. A sales forecast also accounts for seasonal sales trends much more than an annual or even quarterly sales budget because it is broken down into shorter periods.
Simply put, the sales budget shows your company’s desired direction and goal for the year, whereas the sales forecast shows how likely your sales team is to stay on track and reach that destination on time.
Budgeting sales in a structured and accurate manner is not difficult. Following the steps outlined above and using any of the sales budget examples to get a process of the structure should now provide you with a clear starting point. You can create a realistic sales budget that will assist both your sales team and your company in remaining profitable and growing. Create your sales budget today!
Sales Budget FAQs
Why sales budget is prepared first?
A master budget must always begin with the sales budget, as this determines the number of units that must be produced. The next step would be to create a production budget, which will help determine how many units will need to be produced each period in order to meet sales targets.
What are the six types of budgets?
The types of Budgets are (i) Sales Budget (ii) Production budget (iii) Financial budget (iv) Overheads budget (v) Personnel budget and (vi) Master budget!