what is sales budget

What is a Sales Budget? How To Calculate It?

Every business contains a master budget. Sales budget is the foundation of other budgets in that master budget such as the production budget, labor budget, and administrative budget. 

In this article, we’ll explain what a sales budget is, why it’s important for your company, how to create a sales budget and all the other nitty-gritty details you should know.

So without further ado, let’s jump right into it.

What is a Sales Budget in Business?

A sales budget is a financial estimation that projects the amount of revenue a company can generate in a specific period, typically a month, quarter, or year. It shows us how much a company can expect to sell and earn during that time.

Sales budgets are functional budgets because they facilitate different functions like the costs and income of a business. 

Let’s have a look at a quick example. 

Say you have a bakery shop. Every Sunday, you sell about 50 pastry cakes. Each cake costs about $3. Going back to the concept of a sales budget, your sales budget for Sunday is about 50 x $3 = $150. You can extend this to a week or a month.

A lot goes into a sales budget including total units sold, price per unit, and revenue projection. You must also consider sales patterns, economic conditions, and time of the year, among other factors.

What’s the Purpose of a Sales Budget?

A sales budget acts like a roadmap that manages the overall finances of your business. It serves several purposes in your company’s sales planning and goals. Here are a few reasons why you should have a sales budget:

Basis for Other Budgets

As mentioned earlier, other budgets in the master budget are dependent on the sales budget. The sales budget highly influences other budgets such as marketing budgets and production budgets. If you have a clear sales performance in mind, you can set your marketing strategies, production levels, and labor costs accordingly.

Resource Allocation

A sales budget allows you to effectively allocate your resources throughout your company. For example, think about inventory management. If you have an expected number of products to sell, you wouldn’t want to allocate a budget for too many extra products. Similarly, if you expect a busy season, you can add some additional budget for hiring more manpower.

Plan Expenses

When you have an expected sales amount in mind, you can distribute your expenses more easily. Since you know which section of your company will be responsible for more sales, you can spend in that department accordingly. This reduces any chance of putting your egg in the wrong basket.

Measure Performance

A sales budget ensures that your sales team is putting in the right effort. It also lets you measure the performance of your sales strategies and which one worked best. Since a sales budget is like a reference point for your expected sales, you can analyze your current statistics with that to analyze what you need to do better.

Not only that but it will also motivate your sales team to perform better and increase their productivity.

Risk Management

Risk management is a crucial part of your business. A sales budget helps you identify potential risks you can face and the current market uncertainties. With such prior knowledge, you can develop effective plans to deal with the risk and avoid any harm and loss. It enables you to face any upcoming challenges.

Why is a Sales Budget Important?

With a sales budget, you can set realistic and proper sales goals. Since you’re using a framework to estimate your overall revenue during a specific period, it helps you perform robust financial planning for your company.

On top of that, it sets a milestone for your sales performance. Whether you’re underperforming or meeting your sales goals perfectly, you can analyze what’s working and what’s not due to having a sales forecast.

For any business, the ultimate goal is to generate more revenue. Without a sales budget, you can’t track your current efforts and therefore hit the wall. To generate more revenue, you need to come up with new targets and fulfill them using specific strategies. That’s what a sales budget will help you achieve.

Types of Sales Budgets

When it comes to classifying sales budgets, it depends on different factors including your specific industry, activities, time, and organizational structure. Some popular sales budgets are:

Incremental Sales Budget

This is a simple and the most common type of sales budget. You basically take the sales budget of the previous period and increase or decrease your budget accordingly. If most of the cost parameters remain the same in your company, this type of budgeting is more helpful.

Zero-Based Sales Budget

Unlike the incremental budget, this type of sales budget assumes that all department budgets are zero and projects all sales from scratch. Every budget cycle, the company evaluates its sales needs, goals, and expenditures. Though common, it can be time-consuming. 

Activity-Based Sales Budget

In this sales budget, any activity that adds to the cost of the company needs to be first analyzed to predict the costs. It’s difficult to process these and takes a lot of effort and research.

Flexible Sales Budget

A flexible sales budget is dependent on the company’s revenue levels and changes accordingly. It consistently changes depending on the company’s cost variations.

Elements of a Sales Budget

A sales budget consists of many components including:

Sales Forecast

Sometimes used interchangeably with sales budget. Sales forecast is the expected sales amount of units or services during the budget period. It serves as the foundation for your sales budget. Historical data, current trends, and your company strategies help you create a sales budget.

Price Per Unit

This is the price you charge per unit of the product or service. Since over the period, this price can increase or decrease depending on your situation, it can have a direct effect on your sales budget. Some companies prefer calculating using individual products while others use product clusters.

Overall Revenue

This is the product of your sales forecast and price per unit. In other words, it’s the total revenue you’ll generate in the period. The final sum is considered as the sales budget. This is the most important goal for any business. 

Sales Period

This refers to the allocated time for the sales budget. There can be monthly sales budgets, quarterly sales budgets, and yearly sales budgets.

Beginning Balance

This is the balance you have at the start of your budget cycle. It consists of any due you have from the last cycle or the profit you gained. This goes on and on whenever a new cycle starts.

Besides, when creating a sales budget, you should also have the following:

Cash Flow Statement

This financial statement describes the inflow and outflow of cash of a business over a short time. It also takes into consideration what business assets can be converted to cash in that period. Cash flow statements generally include interest payments, income tax payments, rent payments, employee wages, and sales receipts, among others.

Balance Sheet

A balance sheet pictures all existing assets, liabilities, and equity of your organization during a specific period. It’s used for evaluating the business performance and to attract potential investors. 

Income Statement

An income statement shows your company’s earnings and spending along with the profit and loss during a specific time. It shows you the overall performance of each department in terms of generating revenue and making profits.

How to Calculate a Sales Budget

What is a Sales Budget

Now that you have a good understanding of what a sales budget is and why you should have one, let’s learn how you can create a sales budget for your company in 7 easy steps.

1. Determine the Period

The very first thing you need to think about is the time frame for which you want to create a sales budget. This can be a year, a quarter, a month, or even a few weeks. No matter what time span you choose, it plays a significant role in your sales budget because depending on this set of time, you’ll need to adjust your sales strategies.

2. Fix the Price Rates

You need to know and set the price of the products and services you plan to sell in a fixed time. Of course, the price may vary from time to time and you must plan for that. For example, the demand for a product may increase or decrease during certain periods and so will the pricing.

3. Analyze Past Sales Data

Unless you’re starting from scratch, you should have all your past sales information recorded. It’s time to analyze those data and bring out important insights. This data will help you predict your sales for the current period and have an expected amount of revenue in mind. Moreover, you’ll be able to make informed decisions.

4. Understand the Current Market Condition

Understanding historical data is important. However, you must also consider the current market trends. That’s because what worked in the past may not work now. Demand for specific products changes over time. So do people’s needs and tastes. Hence, doing thorough market research is crucial before you estimate a budget.

5. Talk to Your Customers

Your customers are a valuable source of information. You can create surveys to gather opinions from your buyers and clients. By doing so, you can understand their buying habits, their needs for your products, and their expectations. Moreover, you can gather more sales data from your customer representatives and competitors.

6. Create a Forecast

After gathering all the necessary data, you can now prepare a raw sales forecast to predict how many sales you’ll make and how much revenue you’ll generate. 

7. Finalize Your Sales Budget

With the forecast created, you can compare it with the previous data, your competitor’s data, and other factors to determine the final sales budget for the period. You can also recheck the calculations for the maximum accuracy.

Sales Budget Example

Alright, that covers most of the basic things you should know about sales budgets. With all that knowledge, let’s create a sales budget for an imaginary company to get some practical knowledge about it.

Say, there’s a company called SmartPhone Mania that sells phones and gadgets. It has a flagship product called SP 100. We’ll create a sales budget for the product during the October to December quarter.

First, we’ll look at the historical sales data. Suppose, these are the sales figures for the last quarter:

July: 100 units

August: 120 units

September: 150 units

Each unit is priced at $50. Our target is to increase the sales by 10% each month. With that in mind, we calculate the target units to sell in the next three months:

October: 150 * 1.1 = 165 units

November: 165 * 1.1 = 181.5 units ≈ 182 units

December: 182 * 1.1 = 200.2 units ≈ 200 units

We can now calculate the total revenue from these units:

October: 165 units * $50/unit = $8,250

November: 182 units * $50/unit = $9,100

December: 200 units * $50/unit = $10,000

Summarizing all the calculations into a table brings us to this result:

MonthProjected Unit SalesRevenue
October165$8,250
November182$9,100
December200$10,000
Total547$27,350

The company can now use this sales budget to monitor its sales performance and adjust its strategic decision-making throughout the period. 

However, this is only a beginning step. The company can add further details to finetune the budget and pave its way to financial success.

Final Thoughts

And that covers almost everything you need to know about sales budgets. This article should be a good starting point to get your feet wet in the world of financial planning and forecasting. Next, you can continue your study by learning about other types of budgets.

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Yakub Hasan

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