If you're wondering where to begin planning for the immediate future of your business, preparing a sales budget is a great place to start. It provides incredibly important information that can form the basis of decision-making across several areas of your organisation.
"Company leaders will often consider the sales budget first because it forms the basis of other budgets which are key to the company’s success," says Mike Gibson of the Institute of Sales Professionals.
So, how are sales budgets actually defined, and how do you prepare one to maximise the benefits to your business?
What is a sales budget?
A sales budget is a financial document that allows a business owner to estimate the revenue they expect their company to make in a specified period. It uses predictions of sales volumes and unit prices to work out how much income can be anticipated over time.
By looking at a range of factors, business leaders can calculate reasonable expectations for item sales and prices, allowing them to figure out how much income they can expect. Recording these figures in official documents or spreadsheets allows you to create a framework for making a range of decisions and actions throughout the forthcoming period.
Sales budget vs forecast
A sales budget is inherently an ambition. It represents a carefully considered target for what a business can reasonably achieve in terms of sales and price over a given time span and therefore calculates anticipated revenue. Companies generally budget to achieve sales success.
Meanwhile, a sales forecast is a real-time look at what is actually happening and how it might impact the overall goal. If a sales budget sets out a plan to sell 1,000 items at £10 each over a year, a forecasting exercise might be carried out after six months to find out whether the business is on course to achieve this, or needs to adjust its strategy or goal.
Importance of sales budget
A sales budget provides a framework for all other decision-making in a business, along with a clear sense of purpose.
"A properly considered sales budget should be at the heart of any company’s future planning," says Gibson.
"It is also vital when considering what resources will be needed to deliver the expected sales and what expenses will be required to support the sales effort."
Effective workforce management
A sales budget is also critical for effective workforce management. Not only does it give a clear, common goal to work towards but it can be used to set expectations and ensure staff are correctly incentivised.
"Once a sales budget has been agreed, the next step is to break it down into team and individual level," says Gibson. "Each sales leader and front-line sales professional should own part of the sales budget. This allows the company and the individual to monitor performance against their goal, allowing under or over performance to be quickly identified."
Variable cost management
Aside from human resources, many other elements are required to turn a business plan into reality, meaning many businesses have variable costs, and again having a high-quality sales budget provides the launch pad for managing these effectively.
Sanjay Aggarwal, Co-Founder of artisan food producer Spice Kitchen, says detailed sales budgeting allows the firm to make informed purchasing decisions.
"As a business with volatile, seasonal demand, we need to know how many jars, boxes and other items to order to package the batches of spices and other products we sell," says Aggarwal. "If we know we expect a certain level of sales in November as Christmas gifts, we can order the correct amount of packaging in October."
Using sound sales budgets and an American Express® Business Gold Card with extended payment terms of up to 54 days, businesses can purchase goods they need to make sales ahead of receiving the associated revenue, allowing them to smooth cash flow and maximise profit¹.
How to make a sales budget
Creating a sales budget ultimately comes down to estimating the volume of sales and unit price over a given period, then performing a calculation.
To be able to do this you need to have the correct information, which means involving as many people from the business as possible. Not only may they have an insight you hadn't considered, but involving them will also provide a sense of ownership if they will be part of delivery.
Gibson has one further tip on sales budgeting techniques before you get started: "Document your budget assumptions so that you have a record of how the budget was created. In nine months you might be scratching your head trying to work out why there is such a difference between actual and planned performance."
Step 1
The first step in preparing a sales budget is setting the parameters - what time period is most useful; which products and markets are you considering; and what price levels do you expect? This isn't about guesswork but a process of educated prediction and sensible decision-making.
When estimating sales volumes, past performance and future expectations both need to be considered.
"Make full use of your historic sales data," advises Gibson. "A well-managed customer-relationship management system should be able to tell you cycle times, conversation rates, deal sizes and much more."
It also pays to look at what is on the horizon - from scheduled events such as religious holidays to widely-expected shocks such as interest rate hikes. How will these impact supply, demand and ultimately sales?
Aggarwal also looks at data from other similar businesses when sales budgeting, especially when taking on new customers. "We have a good network and talk to other brands to see how they fared with a certain client," he says.
Step 2
The second step is to perform the calculation itself.
If you have decided to look at a six-month period and estimate you will sell 100 items each month at £10 each then you can multiply 100 by 10 by 6 to get an estimated revenue of £6,000.
This is a very simplified example - it is likely you will break your budget down by different lines or markets, and have varying expectations over time, leaving a more detailed picture but ultimately an overall revenue figure in the same way.
Sales budget example
If Company A expects to sell 100 of Product X in January, and 150 of the same item in February, and the unit price is £5, then it can perform the following calculation.
- 100 x 5 = £500 revenue in month 1
- 150 x 5 = £750 revenue in month 2
If the business expects to offer discounts totalling £50 each month as part of its strategy to drive these sales, it can then subtract that as below.
- £500 - £50 = £450 revenue in net sales budget for month 1
- £750 - £50 = £700 revenue in net sales budget for month 2
A sales budget can be formatted to separate out different product lines, markets and time periods as is most useful and intuitive for an individual company. It should be displayed as clearly as possible and widely distributed to those who need to use it.
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