Purposes of Budgeting

The budget is very important for the successful operation of the sales force. It serves several purposes including planning, coordination, and evaluation, each of which is discussed in this section.

Planning: Companies formulate marketing and sales objectives. The budget determines how these objectives will be met. The budget is both a plan of action and a standard of performance for the various departments. Once the budget is established, the department can begin organizing to realize that plan. This is especially important to salespeople. It is through a detailed breakdown of the sales budget among products, territories, and customers that sales reps learn what management expects of them.

Coordination: Maintaining the desired relationship between expenditures and revenues is important in operating a business. The objective of a business is to buy revenues at a reasonable cost, and a budget establishes what this cost should be. If sales of $5 million are forecast, management can establish how much it can afford to pay for that revenue. If the company wants a profit of 10 percent on sales, then $4.5 million can be paid to “buy” the $5 million in revenue. Part of the $4.5 million would go to the production and administrative departments, and another portion would be available to operate the sales department.

Thus the budget enables sales executives to coordinate expenses with sales and with the budgets of the other departments. The budget also restricts the sales executives from spending more than their share of the funds available for the purchase of revenues. Hence the budget helps to prevent expenses from getting out of control.

Evaluation: Any goal, once established, becomes a tool for evaluation of performance. If the organization meets its goals, management can consider the performance successful. Hence the sales department budgets become tools to evaluate the department’s performance. By meeting the sales and cost goals set forth in the budget, a sales manager is presenting strong evidence of his or her success as an executive. The manager who is unable to meet budgetary requirements is usually less well regarded.