Sales budgets and their uses - Marketing Management

Budgets, stem from the sales forecast, and the sales budget is the vehicle through which sales are generated. Thus the sales budget comes after the sales forecast, and this is a representation of each salesperson’s sales broken down by product type, by customer type and by individual territory. The sales department budget then follows, together with other departmental budgets. Although we use the term ‘sales department budget’, its true description reflects more than purely selling.

It includes forthcoming investment in promotion, such as different forms of advertising, displays, exhibitions, consumer and trade promotions, etc. It also includes investment in distribution, which includes distributive intermediaries and facilities such as warehousing and physical distribution of finished goods to customers. Additionally, it includes marketing research expenditure, selling expenditure and all the various costs that go into winning orders. For definition purposes, cost accountants subdivide the sales department budget into the selling expense budget, the advertising budget and the sales department administrative budget.

These terms of course reflect production orientation, and better descriptions might ultimately be found for each of the subdivisions which reflect a more modern marketing orientation. However, accountants use these terms that are now universally accepted, so for these reasons they are included here.

Use of preparing Sales Budget

A budget differs from a forecast in that it is a representation of what is planned to happen, whereas a forecast is concerned with what is expected to happen. The forecast is far more uncertain, because it is affected by extraneous factors, whereas the budget is to do with internal matters, and these can be controlled directly by the organization. The relationship is explained diagrammatically.

It has been explained that the budget is derived from the sales forecast, and business budgeting cannot commence until the forecast has been agreed. Budgeting requires detailed planning of all duties to be undertaken during the budget period (normally one year ahead). The total sales budget is divided among the individual product lines to be sold in terms of apportionment of expenditure on advertising, packaging, personal selling etc. The way the total sales budget is apportioned is, of course, a decision for marketing management.

It is important to ensure that the sales budget co-ordinates with other budgets in the organization. For instance, the sales budget should not plan to achieve more sales than production is budgeted to manufacture. Budgets must also be flexible to allow for changing conditions or unforeseen circumstances, and in some companies it might be necessary to prepare more than one budget as a contingency measure. Thus flexibility is important, because if during the budget period it seems as though another set of circumstances is likely to prevail, then the budget might need to be altered to cover such a contingency.

When actual expenditure differs from the budgeted expenditure, the departmental manager should explain the deviation. Cost accountants refer to each item of cost as a budget or cost venture, and they describe these differences as ‘variances’. The term used to describe this process of control is ‘management by exception’, and the philosophy implies that only when events do not go as planned does an investigation need to be made. Budgeting is not merely a matter of planning; it is also used as a method of control. Furthermore, realistic evaluation cannot take place unless detailed plans have been agreed before the budget period.

In short, budgets provide a financial statement of the company’s plans and policies, and reflect the co-ordinated efforts of all departments (or cost centres) within the organization. The sales department budget is thus the marketing function’s share of the company budget and this, in turn, is broken down into constituent parts covering promotion, selling, administration etc., and then allocated between each product within the range of products.

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