What is Sales Budgeting Process?
Sales budgeting process is a financial planning process that involves estimating the revenue that a business expects to generate from the sales of its products or services over a particular period, typically one fiscal year.
The process usually involves analyzing historical sales data, current market trends, and future growth projections to determine the expected sales figures. The sales budget is then used as a baseline for creating other budgets, such as production budgets, marketing budgets, and cash budgets
Table of Content
- 1 What is Sales Budgeting Process?
- 2 Types of Sales Budgeting Process
The budgeting process typically comprises the following steps:
- Research and analysis to assess the market conditions
- Preparing a sales forecast based on past data and market conditions
- Prioritising the objectives determined in the planning process
- Evaluating and quantifying the total available resources
- Determining and quantifying the inputs and activities needed to achieve the desired objectives.
- Allocate a part of the total resources towards each input or activity.
Types of Sales Budgeting Process
- Top-down budgeting
- Bottom-up budgeting
In the top-down budgeting method, the top management prepares a high-level budget based on the firm’s objectives and allocates the amounts for the individual departments including sales. The sales department managers prepare their budget based on these numbers.
The top management uses the previous year’s budget and financial reports, past data, current market conditions, and macroeconomic factors to prepare the high-level budget. It may invite suggestions from managers of the different departments, but the decision to include or reject these suggestions remains with the top management.
Topdown budgeting suits smaller business structures where the chain of command between the top management and lower-level managers is shorter.
Top-down Budgeting Process
The top-level budgeting process begins with top-level executives meeting to set targets for sales, expenses, and profits. The finance department then allocates budgets to the other departments. The sales department now prepares its detailed budget, expressing the sales function in terms of resources.
The detailed budget from the sales department is sent back to the finance department that then reviews it to ensure that it is aligned with the company’s overall goals. The budget may need revisions, after which it is finalised and entered into the system.
Advantages of Top-down Budgeting
- It helps to focus on the overall growth of the organisation.
- It ensures that department managers are aware of the top-level management’s expectations.
- It aligns departmental targets to the overall goals of the organisation.
- It is less time-consuming and less resource-intensive.
Disadvantages of Top-down Budgeting
- Departmental managers are less involved in the budget-making process, potentially decreasing their motivation to ensure its success.
- Top-level managers may set unrealistic targets which may be challenging for lower-level managers to achieve.
- Without inputs from the key people involved, budgets can often be insufficient or excessive.
Bottom-up budgeting begins at the department level, moving up to the top level. Here the various departments compile their targets and cost estimates for the given accounting period. All the individual estimates are then added to get the overall budget of the organisation. In this method, the managers of each department provide their inputs since they are more familiar with the day-to-day operations of the company.
In bottom-up budgeting, targets and resources are estimated at the most detailed level, reporting line item for each unit or department. Once departments prepare their projections of activities and expenditures, the costs are added to arrive at the total budget for the department.
The budgets of all departments are then summed up to obtain the overall budget for the organisation. Finally, the budget estimate is submitted to the top management for approval. The top management reviews the budget to see whether the budget is aligned with the goals and objectives of the firm for the accounting period.
If the top management is not satisfied with the budget estimates, they may ask the respective departments to revise the budgets and resubmit for approval. Once approved, the budget is sent to the finance department to allocate resources to individual departments.
- Estimates are more realistic and accurate because department managers can understand the costs, resources, and requirements of their respective departments better.
- There is more attention to detail regarding the targets and resources needed to achieve those targets.
- When managers are involved in the budget-making process, their motivation to achieve the targets is higher.
- If errors occur at department levels in the estimation, they can compound when individual budgets are added up.
- Sometimes managers can estimate more resources than needed while keeping targets low to improve their chances of exceeding targets.
- It generally takes more time than top-down budgeting.