What is the Budget?

A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses. 

Importance of Budget in Accounting

• A budget helps to figure out the long-term goals of an organization and work towards them.
• The budget helps in tackling unforeseen situations that may arise within an organization in the near future like recession, economic crisis, competition in the market etc.
• The budget enables the business to meet its objectives and make financial decisions confidently.
• The budget also helps in ensuring that the business has enough money for future projects.

Sales Budget

The sales budget can be defined as a financial plan which helps in the proper allocation of the available resources to achieve the forecasted sales. The main purpose of this budget is to utilize the resources to their maximum limit and forecast sales which helps in estimating the demand of goods and services in the market which is an important step for the preparation of a sales budget.

Selling

The term “selling” can be defined as a process wherein goods or services or any valuable item is exchanged for money or any other valuable item. It involves the process of persuading any person or a company or an organization to buy their products/services

Requirements of Selling

Building long-term relationship with the Customers

To turn prospective customers into long term customers, it is necessary to build a long-term relationship with them so that they can bring more business to the organization or a company in the future.

Being a good listener and catering to the requirements of the Customer

It is always necessary to understand the needs of the customer rather than forcing him into buying products or services. In order to promote sales, we must attach emotions to the products which the customers want to buy.

Self- Motivation

It is important that people in the organization take failure as another learning experience and always keep themselves motivated and energized whenever they face any prospective customer which in turn will lead to an increase in the sales volume.

Different Factors that Influence Sales Budgets

The factors affecting sales budget can be bifurcated into two categories:

Internal Factors

• Sales Trend: The past sales which the company makes during a specified period helps in predicting the future sales possibilities.
• Production capacity: The optimum and effective utilization of the production capacity of the plant should be evaluated while preparing the sales budget so that the company can achieve the desired target quickly and efficiently.
• Product diversification and development: The company after entering into a new product line wants to increase its profitability and sales volume and to do so the sales budget must be prepared accordingly so that it facilitates product development.
• Seasonal Fluctuation: When the sales forecast is done by the company, it takes into consideration the changes that might be evident during the seasonal fluctuations like weekends, the first day of the week etc.
• Sales promotion and advertising: The effective sales promotion of a newly launched product through advertising, offers and discounts contributes immensely in increasing the sales and preparation of the budget too.
• Price Fluctuation: The change in price affects the potential sales of a product and it is an important factor that is taken into consideration while preparing a sales budget.

External Factors

• Government Policy and Intervention: The government through the imposition of various laws and policies takes overall control over the sale of specific products which eventually affects the preparation of the sales budget too.
• Competition in the market: The number of competitors that exist in the market and their impact on the market are some of the factors which are determined while launching a new product into the market and drafting the sales budget.
• Technological Advancement: With the change in technology there is a shift in the customer demand and preference for a particular product and therefore its selling drops down considerably. So, it is important to take this factor into notice while drafting a sales budget.

Steps Involved in Preparation of a Sales Budget

Step 1 : Budget Period: The first step which is involved in the preparation of a sales budget is to determine a specific period for which it is to be made which can either be monthly, quarterly or annually.

Step 2 : Sales Data: The next step which is involved in the preparation of a sales budget is the collection of sales data of the previous years from the company which will help in making a realistic and accurate budget. The market share of the company, its total sales are also some of the factors which should be considered.

Step 3 : Market Trends: A thorough study of the economic condition, market fluctuations, competition is required to be made to make a proper forecast of the sales trend and prepare the budget accordingly.

Step 4 : Production Capacity: In the preparation of a sales budget, it is necessary to determine whether the company's plant has sufficient production capacity to achieve the desired sales numbers.

Step 5 : Sales Budget Preparation: In preparing a sales budget proper planning is done whereby the head of every department of the organization will provide the sales figure for the future and the expected revenue which will eventually go to the central sales budget which will finalize the budget.

Importance of a Sales Budgets

• Determine Sales Goals: The preparation of a sales budget sets the sales team into action and makes them more focused on achieving their respective sales target. The corporate sales team as a result works more efficiently and diligently.
• Cash Flow Management: The budget preparation helps the company to determine how much of the liquid cash it needs to have, so to achieve the required sales revenue target when the market becomes unfavorable.
• Estimate Overhead Costs: The drafting of the sales budget helps in determining the profit margin of the corporate by analyzing the various administrative and sales expenses that it has to bear in addition to the manufacturing cost.
• Develop Core Strategies: The managers of the organization figure out strategies to attain the desired sales goals by effectively utilizing the available resources. The sales budget acts as an important tool for these managers to frame such strategies.

 Limitations of Sales Budgets

• This form of budget can never be 100% accurate as it based on forecasted data and future events which may or may not turn out to be true.
• The unforeseen expenses are usually ignored while drafting the budget which may crop up out of nowhere due to any unpredicted events or calamity.
• The preparation, approval, editing and modification of the sales budget takes too much time.
• The budget which is approved by the management may not be accepted by the other selling executives or other sales team, as it may seem to be too unrealistic to them and as a result, this might create a dispute within the organization.

Uses of Sales Budgets

• Planning Tool: The preparation of this form of budget helps in planning the profits of the company by giving an estimation of the costs that are required to be incurred and it also helps in achieving the selling objectives efficiently and diligently.
• Instrument of Coordination: The budget acts as an instrument of coordination by integrating or combining the functions of other departments with regards to selling, purchasing, advertising, production and finance. Selling as an important function of marketing helps in increasing the sales revenue of a particular product. More revenue indicates more profitability for the organization thereby providing them financial stability.
• A tool of control: The preparation of sales budget helps to bring about control in the organization with regards to variations caused by doing a critical comparison of the actual costs that are incurred and the budgeted costs. This variance analysis helps in boosting the revenue of the company and helps managers to devise a plan thereby curtailing down the variances to as minimum as possible.

Context and Applications

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for

• B.com (Honors)
• M.com
• Chartered Accountants (CA)
• Company Secretary (CS)
• MBA (Master in Business Administration) (Finance)
• CMA (Certified Management Accountant)