10.8 Key Takeaways and Terms

• The master budget is the over-arching budget for the entire organization. It includes both the operating and financial budget.
• Budgets are important in determining how much money a company can make, and how much they anticipate to spend. It is essential in planning.
• The budgeting process begins with an estimate of sales based on a forecast.
• The sales forecast can be determined from sales from previous years, industry trends, competitors activity, the economy, marketing efforts, and even the weather.
•  The four budgeting methods are: historical method, affordable method, competitive parity, and task method.
• Budgeting is a quantified expectation for what a business wants to achieve, and a forecast is an estimate of what will be achieved.
• Accurate sales figures is the key to the entire budgeting process. Overestimates and underestimates can have dramatic impacts on the planning of the organization.
• Sales forecasting is divided into two broad categories: qualitative forecasting and quantitative forecasting.

Affordable method: an approach to budgeting based on what the business can afford – used often by small businesses

Causal models attempt to identify why sales are increasing or decreasing

Competitive parity: budgeting based on competitive data or industry data

Delphi technique: a panel of outside experts are asked to estimate sales for a particular product or service – the results are summarized in a report and given to the same panel of experts

Expert opinion technique ask experts within the company to produce estimates of future sales – these experts may come from marketing, R&D, or top-level management.

Exponential smoothing is an analytical technique that attempts to correct forecasts by some proportion of the past forecast error

Financial budget: shows an overall financial position by detailing the inflow and outflow of cash from a company

Forecasting is the process of making predictions of the future based on past and present data – most commonly by analysis of trends

Historical analogy: finding a similar product’s or service’s past sales (life cycle) and extrapolating to your product or service

Historical method: using a percentage of last year’s sales to determine the sales budget

Market potential is the total industry-wide sales expected in a particular product category for the time period of interest.

Market research is making use of questionnaires and surveys to evaluate customer attitudes toward a product or a service

Master budget: the most important, over-arching budget for the entire organization – typically composed of two distinct parts: the operating budget and the financial budget

Moving average is a technique takes recent class data for N number of periods, adds them together, and divides by the number N to produce a forecast

Objective (Task) method: a more rational and ideal approach whereby marketing managers first determine what they want to accomplish (objectives) with their communication

Operating budget: shows the incoming-generating activities of an organization – this includes all costs and revenues associated with sales, production, inventory, overhead, etc.

Qualitative forecasting techniques are subjective, based on the opinion and judgment of consumers and experts; they are appropriate when past data are not available. They are usually applied to intermediate- or long-range decisions

Quantitative forecasting models are used to forecast future data as a function of past data. They are appropriate to use when past numerical data is available and when it is reasonable to assume that some of the patterns in the data are expected to continue into the future.

Regression is a specific statistical technique that relates the value of the dependent variable to one or more independent variables

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

Sales force: asking a firm to estimate what future sales might be – these values would be pieced together with a forecast for next year

Sales forecasting can involve either formal or informal techniques or a combination of both. Formal sales forecasting techniques often involve the use of statistical tools, while informal sales forecasting techniques are those such as judgment or intuition.

Sales potential the maximum total revenue it hopes to generate from a product or the number of units of it the company can hope to sell.

Seasonality analysis attempts to identify the proportion of annual sales sold for any given time

Simple extrapolation is an that approach uses some data and simply makes a projection based on these data

Trend analysis: a technique that assumes that sales will follow some form of pattern