10.3 Sales Budget

The cornerstone of the budgeting process is the sales budget because the usefulness of the entire operating budget depends on it. The sales budget involves estimating or forecasting how much demand exists for a company’s goods or services and then determining if a realistic, attainable profit can be achieved based on this demand. Assumptions such as sales in units, sales price, manufacturing costs per unit, and direct material needed per unit involve a significant amount of time and input from various parts of the business. It is important to obtain all of the information, however, because the more accurate the information, the more accurate the resulting budget, and the more likely management is to effectively monitor and achieve its budget goals.

When management has a solid estimate of sales for each quarter, month, week, or other relevant time period, they can determine how many units must be produced. From there, they determine the expenditures, such as direct materials necessary to produce the units. It is critical for the sales estimate to be accurate so that management knows how many units to produce.

If the business under-estimates customer demand, they will not have enough inventory to satisfy customers, and they will not have ordered enough material or scheduled enough direct labour to manufacture more units. Customers may then shop somewhere else to meet their needs. Likewise, if sales are overestimated, management will have purchased more material than necessary and have a larger labour force than needed. This overestimate will cause management to have spent more cash than was necessary. No manager has a crystal ball and can predict demand precisely – but the better management and the marketing department can become at predicting demand, the businesses resources of materials, labour and cash can be most optimally utilized.

How to Prepare a Sales Budget

The sales budget details the expected sales in units and the sales price for the budget period. The information from the sales budget is carried to several places in the master budget. It is used to determine how many units must be produced as well as when and how much cash will be collected from those sales.

The sales budget requires the business to generate a sales forecast for the year. The marketing department will work with management to build a sales forecast for the period (usually a year, broken down by quarters or months).

The sales forecast will use the following information to generate sales:

  • Sales activity for the business from previous years
  • Competitor sales activity
  • Industry trends
  • Economy-wide trends
  • Planned marketing campaigns
  • Weather

 Example: Big Bad Bikes Sales Budget

Photo of a motorcycle shop
“Motorcycle Shop” by , CC BY-NC-ND 2.0

For example, Big Bad Bikes used the above information to estimate the number of units that will be sold in each quarter of the coming year. The number of units is multiplied by the sales price to determine the sales by quarter as shown in the table below.


Table 10.3.1 Big Bad Bikes Sales Budget for the year Ended December 31, 2019

Expected Sales (units) 1,000 1,000 1,500 2,500 6,000
Sales per Unit $70 $70 $75 $75
Total Sales Revenue $70,000 $70,000 $112,500 $187,500 $440,000

The sales budget leads into the production budget to determine how many units must be produced each week, month, quarter, or year. It also leads into the cash receipts budget.

Fluctuations in Sales Budgets

The expected sales units in the Big Bad Bikes example above shows that the new product is expected to increase sales in Quarter 3 and Quarter 4. This may be due to the fact that it will take time to build demand for this new product. It may also be because they expect greater sales towards Christmas.

Sales budgets for fruit and vegetable products may depend on the seasons. Sales budgets for livestock producers (such as beef, pork and lamb) will fluctuate in accordance with the reproductive schedules of animals, whereas for chickens it might be more standard. Sales budgets for seafood producers are highest in Australia around Easter (as Good Friday is a day where traditionally Christians eat seafood) and Christmas (where hot summers mean large turkey dinners that we see on television in the USA and Europe are not the normal). Butchers budget for almost non-existent sales of camel meat in Australia except around Ramadan, where camel burgers at night markets have become a common fixture at Ramadan night markets.

It is important to understand your business, your customers and your market when preparing a sales budget.

Preparing a sales budget” from ACCOUNTING AND ACCOUNTABILITY by Amanda White; Mitchell Franklin; Patty Graybeal; and Dixon Cooper is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Introduction to Operating Budgets” from Managerial Accounting by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.


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Sales Leadership Management Copyright © 2023 by Fanshawe College is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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