Is it always better to start with sales budgeting and build other budgets around it?

Author: Iloka Benneth Chiemelie

30th of August 2014

One could be forced to rush into conclusion but the best approach to address this question will be to reflect on main terms contained in the question. In the general business settings, forecasting is an important aspect of the decision making process, even when insurance and hedging are selected to deal with uncertainties that surround the business environment (Armstrong, 1988). This is because companies will be better positioned to understand what the future holds and drafts a better counter measure for dealing with such future uncertainties.

The forecasting function has become more important in modern businesses as a result of the increase in commitments that organizes need to have to items such as money, employees’ salary and relations, purchases, and other business functions that must be performed in order to meet set business objectives (Wheelwright and Clarke, 1976; Pan et al., 1977; Fildes and Hastings, 1994).

Sales budgeting is one of the forecasting measures adopted by businesses, but it is important to understand that sale budgeting is only one of the budgeting schemes available in organizations. Others include cash budgeting, inventory budgeting, purchase and distribution budgeting and host of other budgeting schemes that will arise based on business functions. However, the question still remains, while should all budgeting start with sales budgeting and is this a wise option? For businesses, the flow of resources used to run the business comes mainly from the exchange of goods and services from the business with the value that customers have to offer (cash) (Thompson, 1967). Since these resources are important for the sustainability of the organization, the monitoring of the market relationship (in terms of forecasting demands and planning supply) is very crucial for organizations (Kotler, 1984).

From the above understanding, it can be seen that preplanning and coordination are important for businesses. The sales budgeting is used to determine the level of expected demand and thus define expected activities that will influence the planning of productions, and supply, recruitment and training of personnel.

Thus, it can be seen that it is the most important aspect of the budgeting process and should be the first with other budgets developed around the sales budget (Horngren, 1984). For instance, if UoL forecasts that the enrollment into “financial management” for next semester is 100 students, in which a class is made up of 20 students and each student pays $10 for the course. The outcome of such sales is that each class will generate $200. Since UoL already have the forecasted sales budget, it will be better positioned to effectively budget other things such as lecturer’s salary, educational materials, online education system maintenance and other related cost factors that will influence the delivery of the subject. Without the sales budget, UoL might be under-budgeting other cost factors (e.g. budgeting for 3 lecturers while in essence 5 lecturers are needed to handle the 5 classes).

Therefore, it will be concluded that it is always better and wise to begin with sales budget and build other budgets around it because it helps to plan the whole process more effectively and enhance the cost allocation scheme in such a way that the budgeting process doesn’t fall below expected and eventually actual outcomes.

References

Armstrong, J. S. (1988), Research needs in forecasting. Inter-national Journal of Forecasting, 4, 449-465.

Fildes, R. and R. Hastings, (1994), The organization and improvement of market forecasting, Journal of the Operational Research Society, 45, 1-16.

Horngren, C. T. (1984), Introduction to Mana > enent Account ing , New Jersey, Prentice-Hall, Inc., Englewood Cliffs (6th edt).

Kotler, P. (1984), Marketing Management , New Jersey, Prentice-Hall, Inc., Englewood Cliffs.

Pan, J., D.R. Nichols and O. Joy, 1977, Sales forecasting practices of large U.S. industrial firms, Financial Management, 6, 72-77.

Wheelwright, S.C. and D.G. Clarke, (1976), Corporate forecasting: promise and reality, Harvard Business Review, 54, 40-42, 47-48, 52, 60, 64, 198.