Most budgets focus on expenditures, detailing how much you can spend based on your expected income for any given period of time. The focus of a sales budget is the opposite of that. Its focus is only on how much money will be coming in. For most small businesses, the sales budget is the first step in budgeting and financial forecasting. The amount of income specified in the sales budget determines how much the company will be able to spend on its other budgets.
TL;DR (Too Long; Didn't Read)
A sales budget is an outline of sales expectations set by management, usually for a period of one year. The features of a sales budget usually include a breakdown of sales for each quarter and the number of units to be sold.
The Purpose of a Sales Budget
A sales budget serves as the basis for other company budgets. As such, it is usually determined by management. Once the sales budget has been written, managers know how much money they will have to spend in other departments, how many employees they can pay, how much raw material they will need and what the production runs should be.
The sales budget also serves as a guide for the sales department, who will strive to meet or exceed the sales budget. If sales forecasts make it appear that the budget was set too high or too low, then the budget may need to be revised. If a company doesn't meet its sales budget, then the money that was budgeted in other departments will need to be paid for by other means, like reducing performance bonuses or liquidating assets.
Sales budgets need to be realistic. Setting a sales budget that's too high can be disastrous for a company, particularly if you need to order materials for production or hire new staff based on that budget. Likewise, if the budget is unrealistically low, the company may have too little inventory or may not have enough staff to fulfill sales obligations.
Difference Between Sales Forecast and Sales Budget
Although they are very similar and are often used together, a sales forecast and a sales budget have some very important differences. The sales budget is the company's expectation of what should be achieved for a specific time period. It is written first, usually for a year or a fiscal quarter.
The sales forecast, on the other hand, is written after the sales budget has been set and estimates what will actually be sold during a time period. The sales forecast is usually written by the sales department. In other words, the sales budget sets the company's goal, while the sales forecast shows how likely the company will reach that goal.
Drafting a Sales Budget
Historical data should be your starting point when creating a sales budget. Look at your sales from last year and compare it to previous years to determine if sales have been going up, going down or have been more or less constant. If sales have been going up by 20% for the past three years, then a 20% increase this year should be your starting point. To break down the sales by quarter, examine each quarter from last year compared to previous years.
Next, take a look at changes you have made to your business model, like increasing your range of products and services or discontinuing products. If 30% of your sales came from a product you no longer carry, this should be considered in your sales budget.
Finally, examine any outside forces or market trends that could affect sales this year. For example, is the market becoming saturated, or has a new competitor arrived in town? Examine industry benchmarks and market surveys to see how sales for your industry are faring. Of course, if this is your first year in business, industry benchmarks and market surveys should be your starting point for your first sales budget.
A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.