Sales Budget

06/04/2011 13:40


Sales Budget:

Learning Objectives:

  1. Define and explain sales budget.
  2. Give and example of sales budget.


  1. Definition and explanation of sales budget
  2. Example

Definition and Explanation:

A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

The sales budget will help determine how many units will have to be produced. Thus, the production budget is prepared after the sales budget. The production budget in turn is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget, and the manufacturing overhead budget. These budgets are then combined  with data from the sales budget and the selling and administrative expensesbudget to determine the cash budget. In essence, the sales budget triggers a chain reaction that leads to the development of the other budgets. The selling and administrative expenses budget is both dependent on and a determinant of the sales budget. This reciprocal relationship arises because sales will in part be determined by the funds committed for advertising and sales promotion.

The sales budget is the starting point in preparing the master budget. All other items in the master budget including production, purchase, inventories, and expenses, depend on it in some way. The sales budget is constructed by multiplying the budgeted sales in units by the selling price.

Example or Sample of a Sales Budget:

Following is the sales budget of Hampton Freeze Inc. (see explanation of this budget)


Sales Budget
For the Year Ended December 31, 2003



    1 2 3 4 Year
  Budgeted sales in cases 10,000 30,000 40,000 20,000 100,000
  Selling price per case $ 20.00 $ 20.00 $ 20.00 $ 20.00 $ 20.00
    ------------ ------------ ------------ ------------ ------------
  Total sales $ 200,000 $600,000 $800,00 $400,000 2,000,000
    ====== ====== ====== ====== ======
  Percentage of sales collected in the period of the sales     70%    
  Percentage of sales collected in the period after the sales     30%    
    70% 30%      

Schedule of Expected Cash Collections

1 Accounts receivable, beginning balance $90,000       $90,000
2 First quarter sales 140,000 $60,000     200,000
3 Second quarter sales   420,000 $180,000   600,000
4 Third quarter sales     560,000 $240,000 800,000
5 Fourth quarter sales       280,000 280,000
    ----------- ----------- ----------- ----------- -----------
6 Total cash collections $230,000 $480,000 $740,000 $520,000 $1,970,000
    ====== ====== ====== ====== ======
1 Cash collections from last years fourth-quarter sales.
2 $200,000 × 70%; $200,000 × 30%
3 $600,000 × 70%; $600,000 × 30%
4 $800,000 × 70%; $800,000 × 30%
5 $400,000 × 70%
6 Uncollected fourth quarter sales appear as accounts receivable on the company's end of year balance sheet.

Explanation of sales budget for Hampton Freeze Inc.

This example contains the sales budget for Hampton Freeze for the year 2009, by quarters. Notice from the example that the company plans to sell 100,000 cases of popsicles during the year, with sales peaking in the third quarter.

After preparing sales budget, a schedule of expected cash collections is also prepared such as the one that appear in our example. Cash collections consists of sales made to customers in prior periods plus collections on sales made in the current budget period. In our example, 70% of sales are collected in the quarter in which the sales are made and the remaining 30% are collected in the following quarter. For example, 70% of the first quarter sales of $200,000 (or 140,000) is collected during the first quarter and 30% (or $60,000) is collected during the second quarter.