Considering sales revenue in determining other costs

 

1. Introduction

In the business setting, budgeting represents an integral aspect of the business process as it is used to predict the future of the business and plan out the right actions to ensure continuity in growth and profitable performance. As such, this paper will focus on the need to start with sales budgeting when drawing out budgets.

2. The need to begin with sales budget

On a general note, forecasting is very important in decision-making, even in cases where insurance and budgeting are used to tackle unforeseen circumstances that can occur in the business setting (Armstrong, 1988). The reason for this is that forecasting assists managers in understanding potential future events and developing necessary countermeasures in cases where the future appears to be littered with uncertainties.

Forecasting is now more important in business because of the increased commitment that organisations have to their business processes – such as increased monetary commitment, employee relations, supply chain, and so on – in the course of achieving set corporate goals (Wheelwright and Clarke, 1976; Pan et al., 1977; Fildes and Hastings, 1994).

Sales budgeting is one of the forecasting measures in business, and it is only one of the numerous forms of budgeting in the business setting. adopt sales budgeting to predict expected sales and then determine how to meet such sales targets.

Most of the businesses acquired the needed resources for running their business processes through the exchange of goods and services (value) with customers in return for the money (value) that customers paid them (Thompson, 1967). Since the flow of resources is important for the business' sustainability, it can be seen that forecasting demand is also important as it will determine the volume of resources that will be demanded from suppliers (Kotler, 1984). Additionally, it is also through such forecasting of expected sales that businesses will be able to know which counter or support strategies (such as HR, PR, Marketing etc.) to adopt in order to ensure sustainability in their business. For instance, is there is a projected decline in sales, the business can decide to increase their marketing strategies as well as reduce price in order to increase sales and overall profitability in the process.

Since perfect solution does come from perfect prediction (Horngren, 1984), then it can easily be envisioned that starting with sales budget and building other budgets around it is the best way forward. This is because if the company perfectly predicts expected sales, it will be better positioned to understand how to meet such demands and increase profitability—and thus better positioned to adopt other budgets carefully.

3. Considering sales revenue in determining other costs

In order to avoid bankruptcy and ensure sustainability, what a company earns is actually what it can spend. Thus, the sales revenue generated should reflect what the company can spend in the process of running its business. This goes to imply that the higher the sales revenue, the more the company can spend to promote its business. Thus, sales revenue should be considered when determining other business costs like marketing, advertising, salaries, etc. The more the company can make, the more it can invest back into the business, and vice versa.

4. Conclusion

From the above discussion, it has been shown that it is important to build other budgets around the sales budget because it will ensure the adoption of the right strategies, while companies should ensure to spend as they earn in order to create a higher level of sustainability in their business setting.

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.