Why we should always begin with sales budget and build other budgets around it

Author: Iloka Benneth Chiemelie

Published: 15-October-2014

Introduction

Budgeting is an important aspect of the business process because it helps businesses to predict future occurrence and as such align their activities together with such future occurrence in order to ensure effectively deliver of set corporate objectives.

Always begin with sales budget and built other budgets around it

Generally, forecasting is very important in decision process, even when insurance and budgeting are adapted to deal with expected uncertainties that will occur in the business environment (Armstrong, 1988). This is because forecasting helps companies to understand things that will likely occur in the future as well as develop the right contingency measures for dealing with such future uncertainties.

In the modern business setting, forecasting has gained higher level of importance because of the increase in commitment that organizations need to have in the course of running their business such as monetary commitment, employees’ relation, purchase, supply, customer management and other functions undertaken by organization in the course of achieving set corporate objectives (Wheelwright and Clarke, 1976; Pan et al., 1977; Fildes and Hastings, 1994).

Sales budgeting is one of the measures that businesses adopt in forecasting. However, it is important to understand that sales budgeting one of the available budgeting tools as other forms of budgeting (such as demand budgeting, cash flow budgeting etc.) also prevail in the business world. In any case, it is through such budgeting that companies get a glimpse of expected outcome in the business setting.

Majority of the business acquire the necessary resources needed to run their business from the exchange of goods and services with customers in return of the monetary value that these consumers offer (Thompson, 1967). Since the flow of such resource is necessary for sustainability, it becomes clear that monitoring market relationships (in the form of forecasting demands and planning ways to supply for such demand) is considered critical for the survival of a firm (Kotler, 1984). Additionally, it is only through understanding expected demand (sales budgeting) that the company will be able to apply other business measures and strategies such as marketing (to increase demand) supply and distribution, and post service features. For instance, if the sales is projected to increase by 5%, the company will clearly understand that they also need to increase their supply of raw materials needed to meet demands by 5% in order to ensure that demands are effectively meet. Without the clue provided by sales budgeting, the company will not know how or when to increase or reduce other business facets and they can be forced into exposing their market shares for competing brands as demands might not be meet effectively.

Clearly, the above discussions have demonstrated that preparation and coordination are very important for the success of a given firm. Sales budget aid this process by helping businesses to determine expected level of demand and as such determine the expected level of activities that will be used to enhance the production process, supply, human resource and other activities that will be effectively used to meet the demand. On that account, it becomes clear that it is important to start the budgeting process with sales budgeting because once the sales have been determined, then only will other activities be effectively aligned to ensure that project sales is achieved at the end of the day (Horngren, 1984).

Conclusion

In conclusion, starting with sales budget and building other budgets around it is important because through that means, the company will better understand what to produce and how to produce it with the obvious goals of meeting customers’ demand and corporate objectives.

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.