Sales executives are responsible for formulating three basic budgets: the sales, selling-expense, and sales department administrative budgets.
The Sales Budget: The sales budget is the revenue or unit volume anticipated from sales of the firm’s products. This is the key budget. It is the basis of all operating activities in the sales department and in the production and finance areas. The validity of the entire budgetary process depends on the accuracy of this one sales budget. If it is in error, all others will also be in error.
The sales budget is based on the sales forecast, which was discussed in the previous chapters but the sales budget calls for extreme detail. Every single product sold by the firm must be accounted for. It does little good to tell production planners that $100,000 worth of small parts will be needed. They must be told specifically what small parts will be sold, in what quantities, and when.
Management estimates the sales of each product, and often makes separate forecasts for each class of customer and each territorial division. Budgets for territories and classes of customers usually are of interest only to sales executives. Other departments normally need only the sales budget for product divisions.
To some extent a sales budget can become a self fulfilling prophecy. You predict that 100 units of Model 101 will be sold in January, so 100 units are produced to be sold in January. While sales of that item may fall short of the goal, they cannot exceed it, for that’s all there is to sell. Moreover, there is considerable pressure to make the planned sales figure a reality. Thus, once the sales budget is set, management digs in to make it become fact.
The Selling-Expense Budget: The selling expense budget anticipates the various expenditures for personal selling activities. These are the salaries, commissions, and expenses for the sales force. This is not a difficult budget to develop. If the salespeople are on a straight commission, the amount of the revenue allotted for compensation expense will be determined by the commission rate. Experience clearly indicates how much money must be set aside for expenses. If sales reps are paid a salary, the process merely requires compiling the amounts, taking into consideration any raises or promotions to be made during the coming period. Any plans for sales force expansion also should be anticipated in this budget.
The selling expense budget must be closely coordinated with the sales budget. Suppose the sales budget calls for the introduction of a new product line that requires considerable retraining of the sales force and the addition of a new service department. The expense budgets must reflect those needs. What will it cost to accomplish each line in the sales budget? That is essentially the question the sales manager must answer in preparing the selling expense budgets that will accompany the sales budget.
The Administrative Budget: In addition to having direct control over management of the sales force, the typical sales executive is also an office manager. Ordinarily the staff includes sales department secretaries and office workers; the total staff can be large. There may be several assistant sales managers, sales supervisors, and sales trainers under the sales manager. Budgetary provisions must be made for their salaries and their staffs. Management must also budget for such sales office operating expenses as supplies, rent, heat, power and light, office equipment, and general overhead. These costs constitute the administrative budget.
