Sales budget

The sales budget is usually the first budget that a business will produce – all of the other budgets, such as production, materials and labour, will all be based on the sales level that is being budgeted for. The sales budget will therefore inform and drive each of the budgets that follow it.

The reason why the sales budget is the starting point is because sales are usually a business’s limiting factor or principal budget factor. Generally, there will be one factor that will limit the activity of an organisation, and most of the time this will be demand and the sales that it can achieve.

The starting point in the sales budget will be deciding on a target for the number of units that can be sold in that period. This target will be established through costing and forecasting, areas that you learned about in the Costing, forecasting and variances course in this ExpertTrack.

The sales budget is actually very simple. It is calculated as:

sales budget = sales volume (units) × selling price per unit.

Sales example: Mikan’s Packs

Mikan’s Packs is a small business that makes and sells backpacks. Mikan has been running the business for two years. They make the backpacks in one style and in a range of colours. They all cost the same to make and they sell for £85.

The company is putting together the budget for the coming year, starting with the summer season. Based on forecasts their estimated sales will be 100 units. Let’s calculate Mikan’s Packs’ sales budget:

• sales budget = sales volume (units) × selling price
• sales budget = 100 × £85 = £8,500

So the sales budget is 100 units and will bring in revenue of £8,500.