Question

Why is the sales budget vital to the budgeting process? Why must the operating budgets and capital expenditures budget be prepared before the cash budget? Please answer in 350 words or more. Please add examples

Answer 1

Sales Budget: The sales budget is a forecast of total sales, expressed in terms of money or quantity or both. The first step in the preparation of the sales budget is to forecast as accurately as possible, the sales anticipated during the budget period. Sales forecasts are usually prepared by the sales manager assisted by the market research personnel.

Importance of sale budget

The company’s profit mostly depends upon the ability to sell its products to customers. In the present era it is indispensable to establish the demand for the product even before it is produced. It is the sales order book that the company’s continuity depends upon. A good amount of experience must be necessary to prepare the sales budget. Yet the following factors must be considered in preparing the sales budget:

(a) The locality of the market i.e., domestic or export.

(b) The target customers i.e., industry or trade or a section or group of general public etc.

(c) The product portfolio i.e., the number of products offered and their popularity among the target customers.

(d) The market share of each product and its influence on the product portfolio and the total market

(e) The effectiveness of existing marketing policy on the current sales volume and value.

(f) The market share of competitor’s products and their effect on the company’s sales.

(g) Seasonal fluctuation in sales.

(h) Expenditure on advertisement and its impact on sales.

Format and Example

Where the price per unit is expected to remain constant during the period for all units in sales, the sales budget format will be simple as shown below.

However if a business sells more than one product having different prices or the price per unit is expected to change during the period, its sales budget will be detailed.

The cash budget is prepared after the operating budgets (sales, manufacturing expenses or merchandise purchases, selling expenses, and general and administrative expenses) and the capital expenditures budget are prepared. The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before financing. If this balance is below the company's required balance, the financing section shows the borrowings needed. The financing section also includes debt repayments, including interest payments. The cash balance before financing is adjusted by the financing activity to calculate the ending cash balance. The ending cash balance is the cash balance in the budgeted or pro forma balance sheet. In keeping with the budgets previously discussed for the Pickup Trucks Company, the cash budget in this example will be prepared on a quarterly basis. In addition to the information in the budgets previously prepared, the following information is needed to complete the cash budget.

The following example illustrates the format of cash budget. Company A maintains a minimum cash balance of $5,000. In case of a deficiency, loan is obtained at 1% Quarter interest rate on the first day of the period.