SALES BUDGETING

Sales Budgeting
• Budget: It is a financial statement that
outlines a firm’s intended actions and their
cash flow consequences.
• Sales budgeting: It involves estimation of
future level of revenue, selling expenses
and profit contributions of the sales
functions.
 Major Budget Categories
The outcome of sales budgeting is seen in the form
of two types of documents: sales budget and
selling expense budget.
Sales Budget: It projects revenue computed from
forecasted unit sales and average price.
Selling Expense Budget: It gives us the approved
amount and the details that the management is
prepared to spend to obtain the revenues projected
in the sales budget.
Profit Budget: Occasionally, the sales
budget and selling expense budget are
merged in profit, in which gross profit is
determined by deducting planned selling
expenditure from expected sales revenue.
 Sales Budgeting Procedure
It is a sequential decision –making process
that involves a series of orderly steps:
• Situation Analysis – Sales managers have to get
the facts. The magnitude and reasons of past
differences between budgeted and actual figures
should be considered and learning experience
resulting from previous year’s mistake allows for
a refinement of both procedural and conceptual
aspects of sales budgeting.
• Identification of problems and
opportunities-
The actual and potential threats and
opportunities have to be assessed and
addressed to determine their probabilities of
occurrence and severity of their impacts.
• Development of the Sales Forecast-
Projections are made about the anticipated
levels of sales by territory, product or type
of account, based on planning assumption
about future environmental conditions. The
sales forecast is at the core because it
determines not only budgeted sales revenue,
but also appropriate level of sales effort
required.
• Formulation of Sales Objectives- The sales
objectives have to be developed in a
participatory fashion, giving all the
individuals affected an opportunity to get
involved and to be heard. Objectives have
to be prioritized, validated and supported by
adequate resources.
• Determination of sales Tasks- Sales
management and sales force have to carry
out a broad array of sales activities ranging
recruiting to evaluation and from
prospecting to after sales servicing. The
purpose of this step is to identify tactical
facts.
• Specification of Human Resource
requirements – Sales objectives will not be
realized unless the firm is in a position to
provide sufficient support. So this step
involves the determination of resources that
will be required to implement the specified
activities and to achieve desired objectives.
• Completion of Projections -
Sales objectives, tasks and resources can
now be assembled and integrated into a
comprehensive package. It requires careful
review and coordination of the ingredients
to make the final budget successful.
• Presentation and Review-
Sales management has to present and
defend its budget proposal to top
management. They have to justify their
request for scarce funds by competing with
other parts of the organisation.
• Modification and Revision –
Sales management may have to engage in a series
of compromise sessions. In this step, sales target
and budgets may be adjusted by management,
reflecting its assessment of both the needs of the
corporation and the true potential of the market
place. Such modifications also influence selling
expense budget.
• Budget Approval – The final step is the approval
and authorization of the sales and selling expense
budgets. This step enables sales management to
proceed as the new planning period takes effect.
At regular intervals actual and budgeted figures
are compared to each other. Deviations are noted
and investigated. Budget revision may become
necessary if sales results or costs are substantially
off course.
 Methods : Sales Budgeting
• Affordable Methods: Management first
decides what share of revenues above and
beyond the cost of goods sold is to be spent
on selling and administrative cost after
achieving a predetermined level of profit.
Problem is that it purely an arbitrary figure
which depends on management judgment.
• Percentage of Sales Method : The overall
level of funding personal selling is obtained
by multiplying sales revenues by a given
percentage. Selling expense budget = A %
of Sales Revenue. It is a simple method but
violates cause&effect relationship. In reality
it is the effort that produces the revenue.
• Competitive Parity Method: Use of this
method presumes that managements have
the knowledge of competitors’ activities and
resource allocation and use of industry
average.Problem: It means surrendering
management’s decision making authority to
outside competitive factors.
• Objective and Task Method: It has four
steps-
1) Identify objectives to be achieved by the sales
force.
2) Specify tasks necessary to realize objectives.
3) Determine expenses required to carry out tasks.
4) Appropriate sum total of expenses.
 Problems:
• If a number of different activities are to be
fulfilled simultaneously, the sales managers
have to carefully evaluate, prioritize and
select sensible objectives.
• It is often difficult to compute precisely the
cost to execute a certain task.
• Other Methods: Financial management
concept is used. ROI (Return on
Investment)- Determined by simply
dividing net income by total assets
employed to earn this income.This is also
known as Return on Assets(ROA) or Return
on Total Assets(ROTA).