Question

Please answer both question as a discussion board

The sales budget is considered the primary driver of all other budgets including budget balance sheet and cash budget.

1. Explain why it is critical the sales budget is the first budget prepared in the master budget.

2. Describe how changes in the sales budget can ripple through the operating budgets and impact the cash budget and budgeted balance sheet.

Answer 1

1.

Production and selling of any product depends on market and customers. If their reponse is positive for the product then it will be successful otherwise not. Hence firstly we have to estimate the number of units to be sold based on various factors. Next step would be to design plan for its production. If we first determine units to be manufactured (let's say 5000 units) and then find out that we do not expect any sales then it would be straight out loss for the entire organization. Hence it is critical that sales budget is the first budget prepared in the master budget.

2.

Let's say we estiamted that 10,000 units will be sold and hence based on that figure we start planning, making other budgets like production budget, precurement budget, cash budget etc. The basis of preparing the cash budget will the sales budget and we would consider the cash to be paid, when its to be paid, cash to be received, when its to be received and then suddenly mid way we realise that only 5000 units are estimated to be sold then all the money, effors and planning put previously will be worthless. Henee changes is the sales budget can ripple through the operating budgets and impact the cash budget and budgeted balance sheet.