Sales budgeting is a key function of sales management. It is the key to the entire budgeting in some way and this process involves estimating future level of revenue and selling expenses as well as the profit contribution made by the sales function.
Sales budgeting usually ends with two outputs – sales budget and selling expense budget.
Sales budgets reflect targeted sales revenue and sales expenses reflect the expenses necessary to reach the projected revenue.
Here are a few uses of sales budgets:
- A Sales budget is the Starting Point in Preparation of the Master Budget
Many may not immediately realize it but a sales budget sets off a chain reaction that leads to the development of other budgets which is why doing sales budgeting right the first time matters.
For example, once the sales budget is formed, the production budget can then be prepared. Once the production budget is prepared, budgets for manufacturing can now be prepared as well i.e. labor budget, materials budget, and overhead budget among other things. Once done, all these will then be combined with data from sales budget and selling expense budget to determine the cash budget.
- A Sales budget helps the organization Plan better
Annually, a company is expected to formulate marketing and sales objectives. With a sales budget, it can be determined how these objectives will be met through a detailed breakdown of sales budget among customers, products, and geographic location.
- A Sales budget serves as a yard stick for individual sales and departmental sales progress and performance evaluation
A sales budget can enable sales personnel to evaluate their performance. For example, a sales manager´s performance can be measured against his meeting of sales and cost goals that were predetermined in the planning phase.
Additionally, sales budgets can be used to evaluate the overall departmental performance by looking at overall sales performance against goals set forth in the sales budget.
- A Sales budget can reveal the company´s areas for improvement
A sales budget can reveal the areas that need improvement for the company in order to strengthen its position.
Characteristics and Limitations of Sales Budgets
A sales budget that is well formulated serves as a guide to the company in terms of meeting its targets. It is a financial plan for sales of goods and services that forms the basis for its decision making strategy in terms of sales management.
This is why a sales budget that is good should be flexible, resilient to market volatility, and non-restrictive to the sales functions of the company.
Further, it is important to remember that sales budgets also come with limitations such as its inability to effectively forecast the future trends of events, resistance of the sales budget in some areas of the organization, tedious to make and takes too much staff time, and it has lesser tendency to focus on expenditures that yield long term gains.
Improving Sales Budget Preparation
Having mentioned that sales budget triggers a chain reaction and that it is an important first step in master budget preparation as well as having mentioned some of the limitations of a sales budget, it is now time to turn to improving the way sales budgets are prepared.
Preparing a sales budget is more complicated than many think and this is because it is affected by both internal and external factors.
Internal factors refer to volume of sales, profitability of different products, advertising strategies, price policies, and effectivity of the sales team.
External factors refer to buying power of the consumers, taxation policies, changes in buying trends and preferences, and competitiveness rating in the market.
The external factors are out of the company´s control and they vary from time to time but the internal factors are within the company´s control. Therefore, the efficiency of the sales budget is highly dependent on how accurately and efficiently the internal factors are managed as well.
In order to truly optimize and improve the preparation of sales budgets, corporate performance management solutions like Performance Canvas by DSPanel come in handy.
Performance Canvas by DSPanel is designed to optimize the overall financial budgeting and forecasting process. Part of this is sales budgeting by which it ensures that the company has full and efficient control of the internal factors affecting a sales budget as well as have enough flexibility in order to adapt to the volatility of the external factors.
For example, questions such as what are the top 5 most profitable or least profitable products can be answered quickly; it also has the ability to link advertising or promotion strategies to its forecasting ability; and look at year on year sales trends.
Not only that, it joins the sales budget with the rest of the data in order to come up with a master budget that makes the most sense for the company.
All these are currently being done by many companies in excel and while that works for some, it brings with it limitations that incapacitates the company in some way.
Further, it is an unnecessarily tedious process that takes up too much time, is marred with too much error, and it results in unreliable figures.
Earlier we have learned that we want to make sure sales budgets are correctly done because it sets off a chain reaction which means you don´t want to start the budgeting process with an incorrectly done first step because once that first step is wrong, everything else that follows will be wrong.
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