BUDGET 2  -  DEVELOPING YOUR SALES BUDGET

After you determine your selling price and your product cost , the next step is to "Develop Your Sales Budget". The Sales Budget is always the starting point in financial budgeting. The reason being, production for manufacturers and purchases for retailers as well as inventory levels "depend" on the level of unit sales a business anticipates. Moreover, if you forecast sales of 2,000 units in your first year of operation, then you will have to produce or purchase at least 2,000 units of product. In addition, since most businesses require a level of inventory, business owners generally purchase or produce more then their anticipated unit sales. To summarize, business owners will purchase enough raw materials or finished products in order to cover their anticipated sales level and desired inventory level.

The Sales Budget consists of Six Parts; namely,

Part 1   Determine your Forecasted Sales in Units
Part 2   Determine your Forecasted Sales in Dollars
Part 3   Determine your Forecasted Monthly Sales Percentages
Part 4   Determine your Forecasted Monthly Sales in Units and in Dollars
Part 5   Determine When Customers Will Pay You
Part 6   Determine your Forecasted Accounts Receivable

Part 1  -  Determine Your Forecasted Sales in units
A unit can be defined as the product or service in which you plan to sell. For instance, if you're selling televisions, each television is considered one unit. Your task is forecast the number of units your business will sell in its first year of operation, its second year of operation, and in its third year of operation. The following items should be considered when forecasting your sales in units.

In our example, lets assume Murray expects to sell 4,000 diskettes in year one and 8,000 diskettes in year two. Lets organize this information in the following manner.

Part 2  -  Determine Your Forecasted Sales in Dollars
The second part of the Sales Budget is to calculate your Sales in Dollars for each forecasted business year. To determine your forecasted sales in dollars, simply multiply your forecasted sales in units by your selling price per unit. If you are selling more than one product or service, you are required to calculate a weighted average selling price. Your weighted average selling price is then multiplied by your forecasted sales in units to arrive at your Forecasted Sales In Dollars.

Recall from Budget 1 "Determining Your Selling Price and Product Cost", Murray had set his selling price for each diskette at $26.00 in year one and $24.00 in year two. Therefore, he would simply calculate his Forecasted Sales in Dollars in the following manner.

As indicated above, Murray is forecasting his Sales in Dollars to be $104,000 in 200X. In 200Y, he is forecasting his Sales in Dollars to be $192,000. These figures are extremely important, since they will ultimately appear on Murray's 200X and 200Y Forecasted Income Statement.

Part 3 -  Determine Your Monthly Sales Percentages
The third part of the Sales Budget involves predicting when sales will materialize. This is usually done by assigning percentages to each month, of each forecasted business year.

After much thought and analysis, assume Murray assigned the following percentage to each month of each forecasted period.

As you can see, Murray estimates that 18% of his 200X customers will purchase his product in July. Put another way, Murray estimates that 18% of all diskettes sold during 200X will be sold in July. In addition, Murray predicts 23% of all diskettes sold during 200X will be sold in August, and 24% of all diskettes sold during 200X will be sold in September, and 13% of all diskettes sold during 200X will be sold in October, and so on. Notice, the percentages in each year total 100%. This represents 100% of Murray's customers in each forecasted business year.

Recall that Murray decided upon a business Year End of December 31 (of each year). As a result, the last month to appear in the above list of months is December. Also recall that Murray anticipates his first month of operation will be July, 200X. As a result, a percentage is not assigned to those months prior to July 200X (IE January through June of 200X have zero percentages assigned).

Below provides the remaining hypertext links needed in "developing your sales budget".  This break is required due to the detailed description and analysis of the remaining three parts.

Part 4   Determine your Forecasted Monthly Sales in Units and in Dollars
Part 5   Determine When Customers Will Pay You
Part 6   Determine your Forecasted Accounts Receivable

This concludes our discussion regarding the Sales Budget.  In summary, the following Six Parts form the Sales Budget;

Part 1   Determine your Forecasted Sales in Units
Part 2   Determine your Forecasted Sales in Dollars
Part 3   Determine your Forecasted Monthly Sales Percentages
Part 4   Determine your Forecasted Monthly Sales in Units and in Dollars
Part 5   Determine When Customers Will Pay You
Part 6   Determine your Forecasted Accounts Receivable