The sales budget of an organization indicates the anticipated sales in units of each product/service and the anticipated selling price of these products/services.
The sales budget is dependent upon the enterprise’s projected sales, its manufacturing capability, and its short- and long-term goals.
The First Budget in the Budgeting Process
In an enterprise, the sales budget is always the first budget to be developed. All other budgets of the enterprise – purchase, production, advertising, etc. – are directly dependent on the figures in this budget.
If the anticipated sales figure is low, the enterprise’s raw materials and sales people requirement is low. Likewise, if the anticipated sales figure is high, the enterprise’s raw materials and sales people requirement is high.
The Importance of an Accurate Sales Budget
Taking this into consideration, whenever applicable, an enterprise’s sales budget should be developed for each department separately.
Furthermore, whenever possible, this budget should be prepared by sales person. Besides these factors, it is important that the sales budget be extremely accurate and based on realistic estimates.
All the other departments rely heavily on the figures provided in the Sales Budget in preparing their individual budgets.
An overly optimistic sales budget leads to high production, high inventory levels, and eventual cash shortfall. An overly pessimistic sales budget leads to low production, low inventory levels, and loss of sales due to lack of finished goods.
To avoid these types of situations, it is important to prepare a sales budget which is extremely accurate and as realistic as possible.
Hurdles in Developing an Accurate Sales Budget
Usually, the sales budget is developed based on information and considerations that are not entirely under the direct control of an enterprise.
For instance, an enterprise has no control over the national economy or over technological breakthroughs that may invariably make the enterprise’s products outdated. Furthermore, an enterprise has no direct control over its competitors.
The amount of credit sales and bad debt is another important factor that needs to be taken into consideration when preparing the sales budget.
Even though the exact time when the outstanding amounts are collected is not important for the sales budget, their timing is crucial in developing the cash budget.