Question

The sales budget is usually the first and most crucial of the component budgets in a master budget because all other budgets rely on it for planning purposes.  There are many internal and external factors that must be considered when setting the sales budget. Identify and explain at least (a) three internal factors and (b) three external factors that impact the sales budget.

Answer 1

Sales budget:

This is the planning and estimation of sales during a period.

Internal factors:

No.1) Capacity: this is truly an internal factor, since a business cannot sale beyond its capacity. Suppose the production capacity is 80% and it is already reached; therefore, the business can’t sale in extra.

No.2) Seasonal fluctuation: sometimes in a year the sale becomes high and some other times the sale become low – this is seasonal fluctuation and it can’t be overlooked while making a budget.

No.3) Distribution channel: it includes wholesalers, distributers, retailers, etc. They are the pillars of supply – if the channel is good and active, sales budget could be increased.

External factors:

No.1) Tax imposition: if the government imposes a high tax, sales may be down as well as the budget.

No.2) Market competition: Sales budget depend on the market competition – such budget could be high if the competition is low.

No.3) Country’s economy: in a bright economy (like boom market), sales would be high, since people have purchasing power. This may not be so fruitful in case of a down market. Sales budget should be laid down accordingly.