Sales Budget Definition
The sales budget contains an itemization of a company's sales expectations for the budget period, in both units and dollars. If a company has a large number of products, it usually aggregates its expected sales into a smaller number of product categories or geographic regions; otherwise, it becomes too difficult to generate sales estimates for this budget. The sales budget is usually presented in either a monthly or quarterly format.
The information in the sales budget comes from a variety of sources. Most of the detail for existing products comes from those personnel who deal with them on a day-to-day basis. The marketing manager contributes sales promotion information, which can alter the timing and amount of sales. The engineering and marketing managers may also contribute information about the introduction date of new products, as well as the retirement date of old products. The chief executive officer may revise these figures for the sales of any subsidiaries or product lines that the company plans to terminate or sell during the budget period.
It is generally best not to include in the sales budget any estimates for sales related to prospective acquisitions of other companies, since the timing and amounts of these sales are too difficult to estimate. Instead, revise the sales budget after an acquisition has been finalized.
The basic calculation in the sales budget is to itemize the number of unit sales expected in one row, and then list the average expected unit price in the next row, with the total revenues appearing in a third row. The unit price may be adjusted for marketing promotions. If any sales discounts or returns are anticipated, these items are also listed in the sales budget.
It is extremely important to do the best possible job of forecasting, since the information in the sales budget is used by most of the other budgets (such as the production budget and the direct materials budget). Thus, if the sales budget is inaccurate, then so too will be the other budgets that use it as source material.
It is quite difficult to derive a sales forecast that proves to be accurate for any period of time, so an alternative is to periodically adjust the sales budget with revised estimates, perhaps on a quarterly basis. If this is done, the rest of the budget that is derived from the sales figures will also have to be revised, which can require a significant amount of staff time.
The projected unit sales information in the sales budget feeds directly into the production budget, from which the direct materials and direct labor budgets are created. The sales budget is also used to give managers a general sense of the scale of operations, for when they create the overhead budget and the sales and administrative expenses budget. The total net sales dollars listed in the sales budget are carried forward into the revenue line item in the master budget.
Example of the Sales Budget
ABC Company plans to produce an array of plastic pails during the upcoming budget year, all of which fall into a single product category. Its sales forecast is outlined as follows:
For the Year Ended December 31, 20XX
|Quarter 1||Quarter 2||Quarter 3||Quarter 4|
|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|
ABC's sales manager expects that increased demand in the second half of the year will allow it to increase its unit price from $10 to $11. Also, the sales manager expects that the company's historical sales discounts and allowances percentage of two percent of gross sales will continue through the budget period.
This example of the sales budget is simplistic, since it assumes that the company only sells in one product category. In reality, this example might have been a detail page that rolls up into the main sales budget, where it would occupy a single line item.
Other Sales Budget Issues
It is not customary to include a calculation of cash receipts as part of the sales budget. Instead, the cash receipts are calculated for all of the revenues and expenditures of a business as a whole, and are then summarized on a separate page of the budget.
Budgeted balance sheet
Budgeted income statement
Direct labor budget
Direct materials budget
Ending finished goods budget
Manufacturing overhead budget
Selling and administrative expense budget