What Is a Sales Budget? (With Definition and Importance)
By Indeed Editorial Team
Published June 1, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Sales budgets are financial projections of a company's total revenue for a certain time. Businesses quantify this in both dollars and units and use it to forecast how their organization might perform. Understanding how these budgets work can help a business be more efficient in reaching its sales goals and maximize its profit. In this article, we define sales budgets, discuss their importance, list their elements, provide steps for how to develop one, list some budget management tips, and offer examples of these budgets.
What is a sales budget?
A sales budget is the anticipated number of units a business project it might sell over a specified period. Organizations often track this on a weekly, quarterly, or annual basis. When forecasting these budgets, businesses evaluate historical sales trends, competition activity, and present or anticipated economic circumstances.
Why are these budgets important?
These kinds of budgets are critical tools for organizations to predict their overall performance and the potential income from a particular product. It enables businesses to estimate revenues and optimize resource use. This budget also functions as a planning tool for enterprises, allowing them to establish particular performance criteria. For instance, a business may split its yearly budget of $1,000 by four to arrive at a quarterly objective of $250. Here are some other benefits of using these kinds of budgets:
Calculating other budgets
Companies use these budgets to develop a large number of their other budgets as the quantity of income generated by a firm influences its capacity to spend on marketing, labour, and production. For instance, if a sales team anticipates selling 5,000 units of a certain product in the next quarter, their company is to also manufacture at least 5,000 units of that product, which serves as the foundation for the production budget. Additionally, if a business anticipates an increase in sales activity in the next quarter, it may increase its labour budget to meet these targets.
Determining sales goals
After evaluating the sales income that an organization may anticipate over a certain period, managers can utilize this data to help establish and achieve sales targets. For instance, if a company's monthly budget is $10,000, and it employs ten sales representatives, management may anticipate that each of them may generate $1,000 in revenue the next month. If sales associates routinely surpass these targets, managers may alter the expected revenue per associate.
Supporting the release of a new product
If companies want to introduce new goods, sales teams may be necessary to generate sufficient income to cover the costs of product development, distribution, and selling. These budgets may help determine when the business may have sufficient surplus money to launch the new product. Once the new item generates income, organizations may utilize these budgets to more precisely calculate the amount of the new product to create.
Elements of this budget
The elements of this kind of budget include:
An organization creates a sales forecast based on historical data by analyzing historical trends. This is the number of units they anticipate selling during the course of their budget term. Sales forecasts can look at the amount they anticipate an individual to sell, a team or the overall company.
Price per unit
This budget comprises the most current pricing for a product or service offered by a business. It firmly focuses on a single item or unit. If businesses expect price variation throughout the course of their budget cycle, they add it here as well.
The final element of this budget is the total revenue. You can calculate this by multiplying the sales forecast by the price per unit. The total revenue is the company's budget.
How to develop this kind of budget
The following are some steps to take while creating this kind of budget for a business:
1. Select a period
Determine the period to use for your budget. This might be on a monthly, quarterly, or yearly basis. While most businesses do yearly evaluations, you may choose to explore a shorter period as well.
2. Gather sales prices
Compiling a list of sales pricing is critical for budgeting for your sales. Calculate the costs of your different goods and services. Also, consider any pricing the business may employ in the future as a result of variables such as sales or growing demand.
3. Collect sales data
Conduct research into the company's sales statistics for the time period you've chosen to establish the number of items you might sell. For instance, if you're reviewing the winter quarter, try comparing it to the winter quarter of the previous year. By analyzing prior sales, you can forecast the number of units you may sell in the future.
4. Look at industry market trends
Maintain an awareness of current industry trends. This involves doing research on market swings and consumer preferences for various trends. Knowing the current situation of the market may assist you in determining if the product or service may be relevant within the specified time.
5. Communicate with your customers
Consider speaking with the consumers to determine their spending intentions for the designated time period. It's very beneficial to examine the spending trends of your long-term consumers. Additionally, note that certain clients may make purchases at a particular time of year, affecting various quarters.
6. Create your forecast
After gathering information about your previous sales, market trends, and customer intentions, you can calculate the budget. To do this, multiply the expected number of units sold by the current sales price. For example, if a book shop expects to sell 120 books in quarter one and each book costs $12, this budget may be $1,440 (120 x $12 =$1,440) for their first quarter.
7. Compare results
After the specified time period has passed, compare your actual results to your forecasted budget. Examine how closely your actual findings matched your estimates to measure the accuracy of your calculations. Your findings may enable you to take more effective methods in the future to get more precise estimations.
Budget management tips
The following are some strategies and approaches for efficiently managing your work budget:
Establish the budget's objectives: When designing and maintaining a budget, it's critical to understand the budget's and the company's financial objectives. When you're aware of a business's projected revenue, costs, and income, you can better plan to address any issues or obstacles that may develop.
Create a plan: After determining the budget's objectives, a good method to manage them is to create a strategy for accomplishing them. A good strategy to develop that plan is to include checkpoints throughout the year to ensure that you're meeting the company's goals.
Use spreadsheets: Spreadsheets are an excellent tool to keep track of financial obligations. By generating individual pages for income, spending, and revenue, and also monitoring the budget by month, you may more easily analyze and record the budget.
Examples of this budget
Use these examples of these budgets to help you create your own:
Here's an example of a basic calculation for a plant company's sale budget:
Succulent Divas sells potted succulents for $10. If they sell 1,000 succulents in their first quarter, they can expect this budget of $10,000.
[$10 x 1,000 succulents = $10,000]
If Succulent Divas sells a total of 1,800 succulents (including the 1,000 from the first quarter) by the second quarter, they can expect this budget of $18,000.
[$10 x 1,800 succulents = $18,000]
Here's an example of a more complicated calculation for a tea shop's sale budget with a discount calculation included:
Ling's Tea sells 12-ounce bags of loose leaf tea for $8. They expect to keep their prices consistent throughout the year but offer a discount for those purchasing tea in bulk. After reviewing last year's sales, Ling's Tea factored an expected discount of 3% of gross sales on average per quarter throughout the budget period. They also expect to sell approximately 6,000 bags in the first quarter. To calculate their budget for quarter one, Ling's Tea first multiplies the cost per tea bag by the total number of bags they anticipate selling to get a total revenue of $48,000.
[$8 x 6,000 bags = $48,000]
Ling's Tea then subtracts 3% of the total sales revenue ($1,440) from the total sales revenue amount to find the budget for quarter one. According to their calculations, by the end of quarter one, Ling's Tea can expect a budget of $46,560.
[$48,000 - $1,440 = $46,560]
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