The starting point for preparing all other budgets is the sales budget. In sales, predictions are based on an analysis of past sales and an estimate of future economic prospects. Sales from past years are usually broken down by product line, regions, and sales-people. Management tries to accurately forecast future market conditions. After the forecast is complete, the management tries to develop strategies and policies to obtain its desired market share. Also, planned sales may be overstated or understated, and so it is necessary to revise the sales budget frequently. Ideally, the sales budget should be refreshed every month due to changing economic conditions. The sales budget should also be updated regularly for the company itself since sales tend to serve as a limiting factor for the preparation of all other budgets. This budget is probably the most important of all to the master budget. In any company, the most difficult estimate to make is the sales revenue. To do this, combine: There are advantages and weaknesses in both methods. Neither can be guaranteed to give an even reasonably close estimate; the future is inevitably uncertain. The sales budget is not a forecast. Forecasts are important but they are passive; a budget reflects the positive actions that must be taken in order to influence future events. For example, this may be the sales forecast: With the present amount of effort in sales, we expect sales to run at about the same level as currently. This is vague and indeterminate. By contrast, the sales budget might show a substantial planned increase in sales, reflecting management's intention to add salespeople, increase advertising and sales promotion, or redesign the product. The budget is usually prepared in quantities, products, work hours, and other amounts, after which it is translated into money values. Given that sales budgets contain information that would greatly interest competitors, sales estimates may or may not be given as part of the budget guidelines. Distribution may be restricted and summarized, offering up enough information to permit necessary planning. The sales budget for the XYZ Company for the year 2024 is presented in the example below.Sales Budget: Definition
Sales Budget: Explanation
Common Headings Are:
Production
Estimates need to be prepared for the sales of each product in the range
Territories
Sales of each product, by quantities and values, to be achieved in each area
Type of Customer
Important if different types of customers receive special discounts or special rates
Salespeople
Sales by each seller or agent in a territory
Month
To enable control checks of actuals/budgets
Example
XYZ Company Sales Budget for June 2024
Total
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Product 1
200,000
50,000
80,000
40,000
30,000
Product 2
300,000
80,000
100,000
60,000
60,000
Sales Budget FAQs
Sales budgeting is the process of estimating sales volume for a set period of time. It serves as an important input to most other budgets and it can be used to monitor sales performance.
The components of a sales budget typically include: sales forecast, budgeted price, sales volume, and budgeted sales revenue.
The sales budget formula is: Sales = Price X Volume. The sales volume proportion changes due to special promotions or discounts.
The steps include: forecast demand, calculate prices, calculate sales volume, estimate total revenues & costs, determine margin percentage & break-even point, and verify actual results against budget projections.
A sales budget is developed using both top-down and bottom-up approaches. The top-down approach projects total industry demand for a product or service. In the bottom-up approach, demand for each segment of the market is projected then aggregated to reflect overall industry demand.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
