For any company, the budgeting process must begin with the sales budget. The sales budget should be established first because its information is critical to formulating all other budgets within the company, including marketing, purchasing, and production.
At its core, the sales budget is the foundation of the company’s financial plan and dictates how resources should be allocated to achieve revenue objectives. Sales managers and directors with a clear understanding of how sales budgets drive a company’s financial planning are in a strong strategic position to advocate for their teams and departments.
Sales Budgets: Setting the Company’s Compass
During its implementation, the sales budget becomes an instrument of coordination and control, integrating selling and marketing with inventory and production to drive the efficient use of resources. Your sales budget also provides real-time feedback to guide management in making the necessary adjustments to stay or get on track. An inadequately prepared sales budget could create a cascade of deficient management decisions leading to catastrophic results.
So what are the key elements of a sales budget?
It starts with sales goals and forecasts: For many companies, creating a sales budget involves a top-down, bottom-up process in which the top of the management chain sets the revenue goals and then looks down the chain for the data necessary to create sales forecasts. Forecasting sales is the most important element of creating a sales budget, and it can be the most difficult. Accurate forecasting relies on marketing and industry data, historical trends, competitive analysis, economic forecasts, and statistical trend analysis.
Once initial forecasts are developed, they are run down the chain for adjustments based on strategic variables, such as projected customer growth, product and pricing changes, promotional plans or events, and staffing or operational changes. Once all of the data are collected and processed, a final sales forecast is established, which is communicated back down the chain.
Building a strategy around the sales budget: With the final sales forecast in hand, department managers and sales managers can begin the process of developing specific strategies to meet their sales goals. Through the strategic planning process, managers consider their resource needs and their costs. If a budget amount has already been allocated, they must be able to organize their resources and plan their strategy according to the budget. If they determine additional resources are needed to achieve a sales goal, they must either reorganize existing resources or request adjustments to the budget.
For additional resources, they will need to create a budget to justify added costs by demonstrating how the additional expenditures line up with the company’s strategic priorities. For example, if the company is introducing a new product line it expects will boost revenues, a sales manager may need to add additional training or staff to effectively sell it. The manager’s budget and strategic plan are then passed back up the chain for approval and then incorporated into a departmental or divisional budget.
By following a well-developed process for creating sales budgets, it’s possible to set the compass for the rest of the company’s growth and operations. Now that we’ve looked at how a sales budget is created, in tomorrow’s Advisor, we’ll explore how to use sales budgets as a tool for improving results.