What is Sales Budget?
A sales budget is a financial plan that represents how resources should be allocated to achieve forecasted sales. The sales budget objective is to plan and control the expenditure of resources such as money, materials, personnel, and facilities required to achieve desired sales objectives.
Sales budget and sales forecast are intimately related to each other; if the sales budget is inadequate, the sales forecast will not be achieved. Conversely, if the sales forecast is increased, the sales budget must be increased accordingly.
A sales budget is a basic aspect that influences the budgets of all other departments. It serves as the foundation upon which sales objectives are established. It guides the sales department in determining strategies to expand sales objectives over a given period. Effective implementation of the sales budget enables management to calculate budgetary profits. The sales budget acts as a barometer used to measure the potential profits during a specific period. Sales force management is controlled based on the sales budget.
By relating sales obtained to resources deployed, the sales budget also evaluates sales effort and planning. Its objective is to achieve maximum profits by targeting the most profitable segments, such as customers and products.
Sales Budget Meaning
The sales budget is an important part of the overall budget of the business organisation. It gives details of the sale estimates of the business during a given period. The information given in the sales budget is usually based on test sales, forecast of market trends, salesman’s estimates and other business conditions during a given period.
A sales budget enables the management to know the sales receipts both in quantity and monetary terms, but with the help of other budgets, it can even know its earnings. Sales performance can be judged by fixing district-wise quotas for each salesman. This sales budget therefore acts as a powerful means of controlling the sales force.
Sales Budget Definition
A sales budget is often referred to as the “nerve centre” or “backbone” of the company. It serves as an estimate of expected sales for a specific budget period. The accuracy of sales estimates is important in determining the feasibility of operating budgets. Indeed, a sales budget forms the foundation upon which all other budgets are built.
This budget outlines projected sales figures in both value and quantity. It provides a detailed program and plan for the sales department to adhere to. The sales manager bears the responsibility for preparing the sales budget, utilizing all available information from internal and external sources.
According to Candiff and Still – “A sales budget consists of estimates of the probable dollar (in monetary terms) and unit sales and the expenses of obtaining them”.
The sales budget is a basic budget that influences the budget of other departments, such as production, expenditure, cash, personnel, etc. The budget shows sales estimates during a given period, usually a year. The sales budget indicates both quantities to be sold and the receipts anticipated from such sales.
The management prepares based on its business environment, overall economic condition, the intensity of competition in the market, production capacity, available funds, etc.
The sales budget is prepared based on its overall economic condition, business environment, production capacity, the intensity of competition in the market, available funds, etc.
Objectives of Sales Budget
Objectives of Sales budget are as follows:
(1) Planning
The sales budget helps to plan and collect the resources of the business enterprise based on sales forecasts to achieve sales targets. Thus, it is a tool used in sales planning. It helps profit planning and even guides action towards achieving the organisational objectives.
(2) Control on Selling Expenses
Another major objective of the sales budget is to effectively control the selling expenses to achieve the desired net profit and minimize unnecessary expenses so that the company remains financially stable and profitable.
(3) Control of Sales Operations
The sales budget is an effective tool for sales managers as it manages sales operations. It controls and monitors the activities of the sales force, tacks sales volume, manages selling expenses, optimises the net profit etc.
(4) Measurement of Performance
The sales budget measures and evaluates the performance of sales personnel, sales units, sales regions, products, marketing channels, etc. Through the measurement and evaluation process, specific weak points can be identified, and necessary corrective actions can be taken to overcome such weaknesses effectively.
Factors Affecting Sales Budget
Several factors influence the preparation of a sales budget. For convenience, these factors can be categorized into the following two main groups:
- Internal factors
- External factors
Internal Factors
As the name suggests, internal factors refer to the internal circumstances of the business organisation. These factors are generally within the control of the sales management. They may be summarized as follows:
1. Efficiency of the sales force.
2. Price policies of the business enterprise.
3. Plant development programs.
4. Production capacity, including any future expansion plans.
5. Marketing research, including sales research.
6. Sales promotion measures, including advertising efforts.
7. Past sales trends, including total sales from the previous year.
8. Total marketing area, whether regional, national, or international.
9. Types of customers, such as manufacturers, middlemen, or direct consumers.
10. Selling and distribution systems, including the channel of distribution.
External Factors
External factors are the opposite of internal factors. They relate to the external situation of the business organisation and are largely uncontrollable. The important external factors include the following:
1. Current population and growth rate.
2. Extent of regional, national, and international competition.
3. Role of channels of distribution.
4. General trend of industrial activities in the country.
5. Purchasing power of the general public.
6. Standard of living of the masses – lifestyle, fashion, habits, etc.
7. Economic condition of the country – developed, developing, or undeveloped.
8. General fluctuations in prices, demand, and supply of the product or products.
9. Government policies (both Central and State) toward the industry, including industry policy, taxation policy, import and export policy, subsidies, and other concessions.
Importance of Sales Budget
The importance of sales budget is given as follows:
(1) Instrument of Planning
Sales budget is the main instrument of planning especially in the field of production and distribution. It involves sales forecasting; the sales forecast indicates the prospects of the business and the methods of achieving the objectives shown by the sales budget. It is based on sales forecast, that the production and distribution are planned.
(2) Control of Sales Force
The sales budget facilitates control over the sales force. It establishes the performance standards against which each salesperson’s performance can be measured. If any weaknesses are identified, remedial or corrective measures can be taken immediately. Sales forces can be reimbursed based on performance.
(3) Control over Sales Expenses:
The sales budget serves as an effective instrument for controlling sales expenses. It enables the control of unnecessary selling expenses and fosters an ethos of economy. Through the sales budget, predetermined profits can be achieved by minimizing selling expenses.
(4) Achievement of Targets
The sales budget facilitates the achievement of the desired targets of the business enterprise within a given period.
(5) Modification in Sales Policies
The sales budget can modify sales policies. If any deviations occur, the sales policy can be re-evaluated, and necessary revisions and corrective steps may be taken promptly.
(6) Other Advantages
1. The sales budget maintains and increases the business enterprise profits.
2. It is an instrument for measuring the performance of sales personnel, sales units, products, sales regions, distribution channels, etc.
3. The sales budget is essential for maintaining and developing the market.
4. The sales budget is the primary budget that influences the budget of other departments, including the personnel budget, production budget, expenditure budget, cash budget etc.
Reference:
- https://egyankosh.ac.in/bitstream/123456789/10205/1/Unit-16.pdf
- https://vidyaprasar.dei.ac.in/wp-content/uploads/2022/03/BAM-402-Lesson-8.pdf