Question

The sales budget is usually the first and most crucial of the component budgets in a master budget because all other budgets usually rely on it for planning purposes. Assume that your company’s sales staff provides information on expected sales and selling prices for items making up the sales budget. The sales staff’s compensation is at least partly tied to these budgets. Is there a potential bias in information provided?

Answer 1

Preparation of the master budget starts with a sales budget. The sales budget guides the rest of the budgeting process because the level of production, and therefore the cash needed for production, is directly dependent on the level of sales forecast.Hence, we cannot deny the importance of a realistic but ambitious sales budget to start with.
As per the current practice, the company’s sales staffs provides information on the expected sales and selling prices for the year for the items which is then used to make up the sale budget. This makes the predictions made by the sales team about the year’s potential sales the basis of the company’s master budget.
The issue with this current practice is the fact that the compensation of the sales team is partly tied to the sales figures they achieve in the year. For this reason, prediction of an easily achievable sales target for the sales budget can ensure better compensations for the sales team members. This presents a conflict of interests, and can motivate sales team to loosely forecast the potential sales and selling prices to derive better compensation for them. This negatively affects the company’s prospects of growth, and might constrain the company’s growth to levels much lower than what the company can actually achieve.
Hence, it becomes of utmost importance for us to evaluate the data provided by the sales team to assess any potential bias in the information provided by them for the budget process. It would therefore be better if we could formulate a procedure of formally assessing the sales budget information for avoiding any conflict of interest possibilities.