The Importance of the Sales Budget as a Business Management Tool

Of all the tools business owners have for running and growing their business, the sales budget may be the most important. For any business, the all-important budgeting process must begin with the sales budget. The sales budget must be established first because it forms the foundation of all other budgets, including marketing, purchasing, and production. Essentially, the sales budget forms the framework of a company’s financial plan which dictates how resources should be allocated to achieve revenue objectives.

During its implementation the sales budget becomes an instrument of coordination and control, integrating selling and marketing with inventory and production to drive the efficient use of resources; and then providing the real-time feedback to guide management in making the necessary adjustments to stay or get on track. Needless to say, an inadequately prepared sales budget could create a cascade of poor management decisions leading to catastrophic results.

It Starts with Sales Goals and Forecasts

For many businesses, creating a sales budget involves a top-down, bottom-up process in which the top of the management chain sets the revenue goals and then looks down the chain for the data necessary to create sales forecasts. Forecasting sales is critical to the budgeting process, relying on internal sales data, marketing and industry data, historical trends, competitive analysis, economic forecasts and statistical trend analysis.

Once initial forecasts are developed, they are run down the chain for adjustments based on strategic variables, such as projected customer growth, product and pricing changes, promotional plans or events, and staffing or operational changes. Once all of the data is collected and processed, a final sales forecast is established which is communicated back down the chain.

Building a Strategy around the Sales Budget

With the final sales forecast in hand the management team can begin the process of developing specific strategies to meet their sales goals. Through the strategic planning process, managers consider their resource needs and their costs. If a budget amount has already been allocated, they must be able to organize their resources and plan their strategy according to the budget. If they determine additional resources are needed to achieve a sales goal, they must either reorganize existing resources or request additional resources.

For additional resources, they will need to create a budget to justify added costs by demonstrating how the additional expenditures line up with the company’s strategic priorities. For example, if the company is introducing a new product line it expects to boost revenues, a sales manager may need to add additional training or staff to effectively sell it. The manager’s budget and strategic plan is then passed back up the chain for approval and then incorporated into a departmental or divisional budget.

A Sales Management Tool for Improving Results

When actual sales activities and results are tracked against the sales budget and projections, it creates a comprehensive sales information system that can be used to manage and control variances, which then becomes the basis for projecting future sales for next year’s budget.  Equally important, it provides management with key benchmarks and standards for measuring performance which is the key to improving sales productivity.

The more detailed the information collected, the more comprehensive the analysis of sales results can be made which is useful for current management and control as well as for forecasting sales in the next year. For the most comprehensive view of current and future sales, the analysis should be broken down by territory, salesperson, product-line, and customer base.

Summary

The sales budget is the apex of the planning process because it provides the information used to plan all the business functions needed to drive revenue and profits. Sales managers especially must rely on information provided by the sales budget for planning their strategies, managing their resources, tracking their results, and improving sales performance. That is why the sales budgeting process must be a top-down, bottom-up, company-wide collaboration to ensure a complete alignment of goals, priorities, and measurement for sustainable results.