Sales Budget

The Sales Budget ⇒ shows the expected sales in units of each product and each product’s expected selling price. The Sales Budget is based on the firm’s forecasted sales level, its short- and long-term objectives, and its production capacity.

The first Operating Budget to be prepared is always the Sales Budget, because the Production Budget and all the other budgets for the company are derived from the Sales Budget.

Ex:  If sales are expected to be low, the company will not need as much inventory and may be able to cut back on its usage of some other resources, as well. On the other hand, if sales are expected to be high, more of each of those resources will be required.

External factors include:

1. The current economic environment and the economic environment expected during the future budget period, based on current economic forecasts
2. Consumer attitudes regarding the company’s products and anticipated changes such as to lifestyles and other psychographic158 variables
3. Competitors’ actions and plans
4. The projected level of industry sales, the company’s current and projected market share and the company’s position within the industry with respect to its degree of influence or dominance

Internal factors include:

1. Current sales levels and sales trends of the past few years
2. Pricing policies
3. Credit policies, anticipated changes to credit policies, and their forecasted effects on sales
4. Advertising and promotional activities
5. Unfilled back orders, the fulfillment of which may affect future sales revenue
6. Current and future availability of resources, including plant and equipment, capital, and labor
7. The nature of the production processes, plant capacity, and utilization of resources.

The Sales Budget should be developed by responsibility center or possibly by salesperson, depending on the nature of the business. The Sales Budget needs to be based on realistic estimates of sales, since the Sales Budget will be the driver behind all the other budgets.

• If the Sales Budget is too optimistic, production will be too high, inventory will be too high, and
  problems such as cash shortfall may result.
• If the Sales Budget is too low, production and inventory will be too low, and sales may be lost
  because of a lack of product to sell.

The Sales Budget needs to include sales revenues expected from any new capital projects expected to begin generating sales during the coming year.

The development of the Sales Budget should incorporate forecasted sales volume, forecasted sales mix, and budgeted selling prices.

The Sales Budget is probably the most difficult budget to produce because it relies entirely on information and estimations that are outside of the direct control of the company. The company has no direct control over the economy or over competitors’ actions and technological advances that may affect sales of the company’s product.

If demand is greater than the company’s production capacity, however, the Sales Budget should not reflect the amount the company could sell if it were able to increase production to meet the demand. Unless the company has specific plans in its Capital Expenditures Budget to increase production facilities due to the expected increased demand, the Sales Budget will need to be adjusted to the quantity that will be available to be sold.

One more item that needs to be considered in the Sales Budget is the level of credit sales and when those credit sales will be collected. Though the timing of collections is not critical for the Sales Budget itself, the amount of collections is critical for the development of the Cash Budget.