Learning Outcomes
- Prepare a sales budget
The cornerstone of the budgeting process is the sales budget because the usefulness of the entire operating budget depends on it. The sales budget involves estimating or forecasting how much demand exists for a company’s goods or services and then determining if a realistic, attainable profit can be achieved based on this demand. Sales forecasting can involve either formal or informal techniques or a combination of both.
Formal sales forecasting techniques often involve the use of statistical tools. For example, to predict sales for the coming period, management may use economic indicators (or variables) such as the gross national product or gross national personal income, and other variables such as population growth, per capita income, new construction, and population migration.
To use economic indicators to forecast sales, a relationship must exist between the indicators (called independent variables) and the sales that are being forecast (called the dependent variable). Then management can use statistical techniques to predict sales based on the economic indicators.
Management often supplements formal techniques with informal sales forecasting techniques such as intuition or judgment. In some instances, management modifies sales projections using formal techniques based on other changes in the environment. Examples include the effect on sales of any changes in the expected level of advertising expenditures, the entry of new competitors, and/or the addition or elimination of products or sales territories. In other instances, companies do not use any formal techniques. Instead, sales managers and salespersons estimate how much they can sell. Managers then add up the estimates to arrive at total estimated sales for the period.
Usually, the sales manager is responsible for the sales budget and prepares it in units and then in dollars by multiplying the units by their selling price. The sales budget in units is the basis of the remaining budgets that support the operating budget.
To illustrate this step, assume that GelSoft makes gel-filled seats for bicycles. Management forecasts sales for the first quarter at 40,000 units. Sales are projected to increase by 5% each quarter, reflecting higher demand due to increased marketing. The selling price for each seat is set at $34 and is not scheduled to be increased during the budget period (year). GelSoft’s sales budget would be prepared by showing the sales unit for each quarter multiplied by the budgeted sales price to get the sales in dollars.
| Description | Q1 | Q2 | Q3 | Q4 | Year |
|---|---|---|---|---|---|
| Sales in Units | 40,000 | 42,000 | 44,100 | 46,305 | 172,405 |
| Budgeted Price | $34 | $34 | $34 | $34 | |
| Sales in Dollars | Single Line$1,360,000Double line | Single Line$1,428,000Double line | Single Line$1,499,400Double line | Single Line$1,574,370Double line | Single Line$5,861,770Double line |
To calculate the number of units for each quarter, add the projected increase of 5% to 100% to reflect the new quarterly sales which will be 105% of the prior quarter.
5% = 0.05
100% = 1.00
105% = 1.05
Multiply the first quarter sales by 1.05 (105%): 40,000 X 1.05 = 42,000
Another way to do this is to take 5% of 40,000, which is 2,000, and add it to the base of 40,000.
Continue to do this for each quarter, using the prior quarter as the base.
| Quarter | Projected Increase over prior month | Multiplier | Units (rounded) |
|---|---|---|---|
| Q1 | 40,000 | ||
| Q2 | 5% | 1.05 | 42,000 |
| Q3 | 5% | 1.05 | 44,100 |
| Q4 | 5% | 1.05 | 46,305 |
| Total Projected Sales | Single Line172,405Double line |
Here is a short review of how to create a sales budget:
You can view the transcript for “The Sales Budget” here (opens in new window).
Before you create a production budget based on this sales budget, check your understanding of how to create a sales budget.
