Sales Budget

We will discuss:
Purpose of sales budgets Benefits of budgeting Principles of budgeting Types of budgets Methods of budgeting for sales force Requirements for successful budgeting Developing a sales budget Precautions in preparing sales budgets

Introduction

First used by companies like GM and DuPont in 20s Budgeting process helps represent the organizations objectives and strategies in numerical terms Helps in smooth functioning

Purpose of sales budgets

It serves two major purposes:

Mechanism of control Instrument of planning

Budgets should be prepared by those responsible for achieving stated objectives Organizations budgeting process depends on the revenues that it is getting

a. Mechanism of control:

Controlling and planning are interlinked, controlling is a process of making disciplined effort to follow an established plan of action Sufficient training is to be given to the employees about the best utilization of budgeted resources.

b. Instrument of planning:

Forecasting sales, scheduling the production process and budgeting the expenditure for the organization are part of planning. It works well only when all the levels of people work on it diligently Budgeting is a planning tool which help the organization anticipate all future needs and allocate sufficient resources to get maximum profitability.

Benefits of budgeting:

Improved planning Better communication and coordination Control and performance evaluation Psychological benefits

Principles of budgeting

All employees must be involved in the process It should be practical and gain acceptance in the organization Outputs must be linked with inputs It should be flexible to adapt to environmental factors The management should continuously learn

Types of budgets:
Sales department in general prepares three types of budgets:

Sales budget Sales expense budget Administrative budget and profit budget

Sales Budget

It is a detailed plan showing the expected sales for a future period and is based on expected revenues Most crucial part of the master budget Forecasts are prepared for each product division as production and finance departments should know the no. of units required.

Sales Expense Budget

It is plan that gives expenses that would be incurred by the sales department to achieve planned sales. Includes commissions, salaries, traveling, entertainment expenses and costs incurred on training It must be closely linked with sales budget.

Administrative budget and profit budget:

Administrative budget comprises the budget allocation for general administrative expenses Sales and selling expense budgets are prepared separately, but sometimes both are combined to develop profit budgets.

Methods of budgeting for sales force:

Affordability methods Percentage of sales method Competitive parity method Objective and task method Return oriented method

Requirements for successful budgeting

There are certain criteria that a successful budget should meet.

They are Involvement and support of the top management Flexibility in budgeting

Involvement and support of the top management:

Top management should understand the role of planning as a control tool, then they should ensure that, every employee too understands and appreciates the budgeting process. They can encourage responsible people in the organization to develop budgets as they are the better judges of their performance Management should ensure that budget is viewed as an effective tool but not as a pressure device Control aspects are equally vital and management should define what controlling is and what it means to the organization as a whole.

Flexibility in budgeting:

When changes takes place, organizations rarely achieves planned performance Budget needs to be flexible so that it can minimize the negative effects of variations between the planned and actual performance.

Developing a sales budget:

To develop an efficient sales budget an organization has to follow certain steps:

Review and analysis of the situation Identifying specific market opportunities and problems Sales forecasting Communicate sales goals and objectives Preliminary allocation of resources Preparing the budget Getting approval for the budget

Precautions in preparing sales budgets:

Budgeting process has certain drawbacks too. Let us discuss the draw backs and necessary precautions to be taken to reap the benefits: Inability to project course of future events Inability to gain acceptance Involvement of time Repudiation of the long term needs