The sales budget provides an estimate of goods to be sold and revenue to be derived from sales. Sales budget is a starting point in the budgeting procedure. That is, budgeting exercise usually commences with the preparation of the sales budget because the customers' demand is usually the key factor for most organizations.
Sales budget is one of the functional/operating budgets and is essentially, a forecast of sales to be effected in a budget period. Sales budget defines the quantities and values of expected sales in total as well as product wise and area wise during definite future period.
Sales budget forms the fundamental basis for other functional budgets and it is needed to coordinate the production function with expected demand for a particular product. The preparation of sales budget requires forecasts of quantities to be sold and standard prices at which these quantities may be sold.
Up-to-date statistics covering the following area are usually compiled to prepare sales budget:
1. Past sales by the firm and by its competitors in each geographical area.
2. Movements in the total customer demand and in the market share of the firm and it competitors.
3. The total sale by the competitors in geographical areas not served by the firm.
4. In case of industrial products, trend in sales of the industries to which the customers belongs.
5. The trend of sales in each geographical area compared with trend in other areas.
It is also necessary to give careful attention on the following factors while preparing a sales budget:
1. Quantity and value of past sales.
2. General economic and market condition.
3. Relative profitability of the products.
4. Plans and policies of the firm pertaining to pricing, advertisement and sales promotion, market research etc.
5. Competition
6. Report from salesmen and the quality of the sales force.
7. Seasonal changes in sales and price change.
8. Company's productive capacity.
9. Long-term sales trends.
10. Anticipated introduction of new, improved or substitute product by the company or its competitors.
11. Expected shift of the customers to the competitor.
In most of the companies, sales estimates are prepare by each of the salesmen. These estimates move upwards through formal channel and ultimately reach the chief of the sales function, where they are compiled and adjusted for factors which are unknown to salesmen. The process involves holding of discussions with managers of all levels which broadens participant's thinking.