Question

What are the difficulties in preparing a sales budget? Provide an example of a sales budget.

Answer 1

Answer:

Sales budget refers to the estimated sales revenue and the sales overheads for a particular period of time. It is very necessary to have accurate sales forecast for better utilisation of resources, higher profitability and less wastage.

There are various difficulties in preparing a sales budget because it depends upon various internal and external factors, which are explained below.

1. Seasonal Fluctuations:

Even if seasonal Fluctuations are considered while making sales Budget, then too it's difficult to have exact impact of such fluctuations on sales. The estimated season fluctuations will not be always true. Hence it can cause the difference in actual and Budgeted Sales.

2. Sales-men's Estimates:

While making Budget sales men's estimation is considered. But sales-men's estimations are neither always optimistic nor conservative. Therefore, it become difficult to get proper estimate sales for a period of time.

3. Breakdown of Plant:

Another difficulty comes due to machinery/plant breakdown. Even if all the factors have been favourable, an unexpected breakdown of machinery/plant can impact adversely sales budget.

4. Economic conditions:

Changes in economic conditions makes difficult for management to have accurate sales Budget. Sometimes some conditions are unexpected (eg. Corona viruse). Hence it becomes difficult to estimate such economic condition's fluctuations due to natural calamities and other factors.

5. Competition:

Sometimes, it becomes difficult to calculate the degree of competition in the market. Market changes everyday. Hence degree of competition prevailing in the market becomes a hurdle in preparing realistic and achievable sales budget.

6. Impact of advertising/ sales promotion:

Sometimes the impact of advertising and sales promotions maybe unknown on the customers. In that case, even if company estimates higher sale, it all be wasted if the promotion is not making any favourable impact on customer.

7. Availability of raw materials:

Due to natural calamities or artificial hoarding, the prices of raw materials increases which results in higher cost of production. In such a case prices should also increase for maintaining desirable profit. Such problems also make preparation of sales budget difficult.

8. Salesman Commission:

The sales person's commission also makes preparation of sales budget difficult. For example, if salesman Commission was expected lower, but during the year, salesman demanded for higher commission then it can have negative impacts the sales budget.

9. Demand factor:

Demand changes day by day. Even if company expected high demand for a particular product, a new launch of low priced and Standard quality products may shift the demand, resulting reduction in sales.

10. Past performance/ Trends:

Sales budget is prepared through considering the past sales figures and trends. But economic, financial situation in every year may not be same. Hence it becomes difficult to have a realistic and accurate sales budget.

EXAMPLE OF A SALES BUDGET:

XYZ COMPANY

SALES BUDGET

FOR THE YEAR ENDED DECEMBER 31, 2020

	QUARTER 1	QUARTER 2	QUARTER 3	QUARTER 4
Forecasted unit sales	55000	60000	70000	80000
× Price per unit	$10	$10	$11	$11
Total gross sales	$550000	$600000	$770000	$880000
- Sales discounts and allowances	$11000	$12000	$13000	$13500
= Total net sales	$539000	$588000	$757000	$866500