What Is a Sales Budget?

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Managers examine internal and external factors when creating a sales budget.
Managers examine internal and external factors when creating a sales budget. (Image: DragonImages/iStock/Getty Images)

A sales budget is management's estimate of sales for a future financial period. A business uses sales budgets to set department goals, estimate earnings and forecast production requirements. The sales budget affects both other operating budgets and the overall master budget of the company.

Sales Budget Basics

A sales budget is an estimate of sales for a future accounting period. Sales budgets are often divided into first, second, third and fourth fiscal quarter estimates. The critical components of a sales budget are estimated unit sales, price per unit and the allowance for discounts and returns. Estimated unit sales multiplied by the price per unit equals budgeted gross sales. Budgeted gross sales less estimated sales discounts and returns is the budgeted net sales for the period.

Creating a Sales Budget

It's notoriously difficult to forecast sales and estimate demand. To create a sales budget, managers consider market factors, current economic conditions and business-specific production capacity. To create a realistic sales budget, management needs to confer with sales staff at a variety of levels in different positions. Sales representatives often have key insights into customer concerns and trends, which can help management predict future performance.

Sales Budget and Other Budgets

Although the sales budget is most useful to the sales department, it has other uses. The sales budget is one of several operational budgets that contribute to the master budget for the company. The budgets that feed into the master budget are the direct labor, direct materials, finished goods, manufacturing overhead, production, selling and administrative expense and sales budget. The estimates in the sales budget directly affect the amount of estimated products in the production budget. This, in turn, affects the direct materials, direct labor and manufacturing overhead budgets.

Sales Budget to Actual

At the end of the accounting period, management often performs a "budget to actual" sales budget analysis. Management can either analyze performance using a flexible budget or a static budget. A static budget compares actual results to budgeted projections, regardless of how many units are sold. A flexible budget adjusts the revenue figure for the actual amount of units sold. For example, say that a business had budgeted sales of 10 units at $5 a piece but only sold nine units. A static budget would compare actual results to the $50 revenue budget, while the actual revenue figure for the flexible budget would be $45.

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