Whatever your business plans may be for the coming year, everything will ride on your ability to create a reliable sales budget. Your sales budget will determine how many employees you can hire, how much production you will need, whether you can expand operations or not and how profitable your company will be. When you write your company's master budget, each section will depend on your sales budget.
Sales Budgets vs. Sales Forecasts
If you have ever written a sales forecast, you already know how to write a sales budget. While they are essentially the same thing, a forecast is usually for shorter periods of time, ranging from a week to a quarter. A sales budget is usually for sales you expect to make over the course of a year. In this case, forecasts can be used to ensure that you are on track to meet your sales budget by the end of the year.
Sales forecasts can vary widely from one period to another in many businesses. Business in the summer may be very slow, for example, while sales spike near the end of the year. Sales forecasts usually reflect these trends, while an annual budget takes the entire year into account regardless of seasonal trends.
Read More: What Is a Sales Budget?
How to Prepare a Sales Budget
A sales budget is simply the amount of revenue you expect to bring in over the next year. While costs are an important part of your master budget, they are not included in the sales budget.
If you sell only one product or service, calculating your sales budget may be quite easy. Simply take the number of units you expect to sell and multiply them by the sales price. If you sell multiple items or services, you will need to calculate the sales price for each and then add them together.
Your sales budget should include both the number of units being sold and the total revenue for each type of unit. The number of units will determine what you will need to produce over the year and will determine your budget for producing them. The same principle applies to services as well as products, as knowing how many hours of time will be sold will help you determine how many employees you will need to do that work.
Ensuring Accurate Sales Budget Planning
The first step in drafting a sales budget is to look at last year's sales. If this is your first year in business, you will need to estimate your sales based on the market research you've done, including what the sales benchmarks are for your type of business. Industry benchmarks are available online either for free or for a small fee.
Once you have last year's sales or an industry benchmark, consider the changes you expect to see this year compared to those figures.
- Talk to your customers: Talk to your largest clients first and ask them what they expect to spend this year compared to last year. If you have a lot of clients buying small amounts, consider doing a survey.
- Examine market trends: If sales in your industry are rising or falling, you should account for this in your sales budget.
- Examine your sales prospects: This is often difficult since a prospect is not necessarily going to be a client. However, if you had 20 prospects in your sales funnel last year that turned into five clients, then you can estimate that 25 percent of the prospects you have today may become clients this year.
Once you have finalized your sales budget, be certain that you review it on a regular basis to ensure that you are on track. If sales begin to go higher or lower than you expected, you may have to revise it. Having too many sales for which you didn't plan can be just as catastrophic as not having enough sales. There may be nothing worse than telling a customer that you can't fulfill an order because you ran out of inventory.
A sales budget is determined by the number of units you expect to sell multiplied by the selling price to give you total revenue.