In sales budgeting, there can be different types of budgets that enable an organisation to maximise its resources, eliminate waste, and increase its revenue. In this section, we will discuss the different types of sales budgets.
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Types of Sales Budgeting
A sales budget estimates the sales in units and the revenue generated from sales. A sales budget specifies the amount of money a business is willing to spend on sales-related expenses for the given time period. It covers various business expenses, ranging from sales taxes to the sales team’s salaries, rent payments, and utilities.
Ideally, the sales budget is close to 50% of the annual sales. The format of the sales budget is generally monthly or quarterly; the sales budget can be presented in the annual format but that way, too much information is grouped together. For a business with a large number of products selling spread over a bigger geographic area, it is better to group expected sales into a smaller number of product categories or geographic regions.
The purpose of a sales budget is to help a firm decide its expenditure on sales activities.
A sales budget is a critical element of professional selling. A budget helps in the growth of a business by determining what is needed and how much should be spent on it.
Selling Expense Budget
The selling expense budget is the estimated amount that will be incurred on selling expenses in one accounting period. Every firm has to spend a certain amount on selling and administrative expenses that are not dependent on the manufacturing units.
Selling expenses budget includes those expenses that are needed to achieve the objective of making sales such as sales commissions, advertising and promotion, store displays, and distribution costs. Selling expenses are fixed costs that will be paid on a monthly basis. Distribution costs include costs incurred in getting the product to the customer, for example, order processing, handling and storage costs.
The selling expense budget is prepared by the senior-level managers in the sales and marketing department. It is aligned with the sales objectives of the organisation, i.e., the selling expense budget estimates the selling expenses needed to achieve the desired sales goals.
The important components of the total selling expenses budget are given below:
Selling Personnel Costs
The salesperson is directly involved in selling the product, therefore, the salaries and commission paid to the salesperson fall under selling expenses.
Advertising and Promotion Expenses
Product placement done by advertising the product through various platforms is important for selling the product. Hence, advertising and promotional expenses fall under selling expenses. These are generally fixed.
Variable Selling Expenses
Variable selling expenses include ordering costs, handling costs, and other selling expenses that are incurred only when sales are made and the product needs to be distributed to the customer.
Additional Selling Expenses
Various expenses such as supplies, travel, etc. also fall under selling expenses.
Let us understand the selling expense budget with the help of an example.
ABC Ltd. produces face masks and shields that specifically provide protection against COVID-19 virus. To develop the selling expenses portion of ABC’s budget, the computation will start with the previous historical data and then with variable expenses that cost about ₹15 per unit sold.
The fixed expenses as selling personnel cost about ₹2 lakhs per quarter. The company further estimates that advertising costs for various quarters are ₹15,000, ₹30,000, ₹1, 20,000 and ₹73,000 orderly. This is based on the previous year’s expenditure. The traveling and entertainment costs come out ₹7,300, ₹7,300, ₹15,000 and ₹30,000 for all the quarters.
|** All figures in the table are in ₹||Q1||Q2||Q3||Q4||Total|
|Units to Be Sold||2000||5000||7000||20000|
|Variable Selling Expenses Per Unit||15||15||15||15||15|
|Total Variable Expenses||30000||75000||105000||300000|
|Fixed Selling Expenses:|
|Selling Personnel Costs||200000||200000||200000||200000||800000|
|Travelling & Entertainment Costs||7300||7300||15000||59600|
|Total Fixed Expenses||222300||237300||335000||1097600|
|Total Selling Expense||252300||312300||425000||1397600|
Sales Department’s Administrative Budget
The sales department’s administrative budget comprises an estimate of all selling, general, and administrative expenses for an accounting period. The administrative budget only considers costs not directly associated with sales or production but needed to run the sales function.
It includes executive salaries, depreciation, amortisation, consulting, legal fees, rent, insurance, and office supplies. An administrative budget helps the management to exercise control of the day-to-day activities of the firm. The administrative budget includes all the expenses that a business would incur even if there was no sales activity.
The information included in the administrative budget is not directly drawn from other budgets. The estimate of administrative expenses is derived from the overall corporate activity instead. To estimate costs for this budget, it is useful to determine the activity levels at which incremental costs may be incurred and include them in the budget.
Incremental budgeting is a simple way to derive the administrative expense budget, where the estimates are based on the last budget and adjusting the figures by 5 or 10 percent and using the result as the current budget.