When analysts attempt to budget sales, they rely on many different data sets to determine the best way to allocate financial resources. Furthermore, sales budgeting require analysts to forecast different scenarios. Colin Drury, author of “Management and Cost Accounting” explains that the sales budget is the cornerstone of every other budget: Thus, accurately predicting future sales has significant implications on the expected performance of the organization.
Past results provide great insight regarding potential earnings. Thus, when analysts forecast expected sales they add significant weight to past sales data. Sales budgeting also require observing general trends year-to-year. For example, if the business shows consistent ten percent yearly increase in sales, the company has grounds to forecast a continued rise. Forecasters place greater weight on some years or months than others: a trekking company in Colorado, for example, places greater emphasis on sales from the spring and summer as opposed to the winter season. Likewise, a luxury handbag company in the midst of a long recession might rely more on the previous year’s data than sales from years during an economic boom.
Expected competition is another component of the sales budgeting forecast. Companies with little competition have greater predictability than a business with dynamic competition. If the organization pre-empts a competitor unveiling a new, similar product, the business may conservatively preempt reduced sales in the months of the competing product’s introduction into the market. Organizations in an oligopolic market structure have the most difficult time assessing a competitor’s influence on sales. This is because businesses repeatedly undercut other companies in an attempt to gain a competitive edge. Therefore, businesses in an oligopoly project higher sales than competitors only if they can anticipate being the company that issues the good or service at the lowest cost.
Cost of Materials
A primary factor affecting sales budgeting is the cost of materials. Part of the forecasting process is anticipating the expected change in price for materials necessary for production. Sometimes, accurate projections can mean the difference between steep losses and high profits. An example is fuel and airline ticket sales: A Reuters article explains that when oil hit close to $147 a barrel in 2008, airlines incurred significant losses as a result of the industry’s failure to anticipate this increase. Higher costs tend to result in passing these costs to the customer in the form of higher prices: These higher prices affect sales, usually negatively if other firms do not raise prices. Therefore, predicting the changes in the cost of materials is a large component of sales budgeting.
Sales budgeting includes taking into account the effects of new products, product expansion and entering into new markets. Pre-empting the expected sales of product development requires the business to engage in market research. Market research includes rolling out the product in limited locations and issuing consumer feedback surveys. Businesses then extrapolate these limited results on a larger scale in order to anticipate future sales.
Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.