Budgeting
Forecasts must be as dynamic as the business environment. That means it is not set in stone but will be routinely evaluated for necessary corrections. These sections will explain the importance of budgets and forecasting to the business. This material will enable you to explain the budgeting and forecasting process and discuss its benefits to the company.
7.2 Prepare Operating Budgets
Sales Budget
The sales budget details the expected sales in units and the sales price for the budget period. The information from the sales budget is carried to several places in the master budget. It is used to determine how many units must be produced as well as when and how much cash will be collected from those sales.
For example, Big Bad Bikes used information from competitor sales, its marketing department, and industry trends to estimate the number of units that will be sold in each quarter of the coming year. The number of units is multiplied by the sales price to determine the sales by quarter as shown in Figure 7.7.
| BIG BAD BIKES | |||||
| Sales Budget | |||||
| For the Year Ended December 31, 2019 | |||||
| Quarter 1 | Quarter 2 | Quarter 3 | Quarter 4 | Total | |
| Expected Sales (Units) | 1,000 | 1,000 | 1,500 | 2,500 | 6,000 |
| Sales Price per Unit | $70 | $70 | $75 | $75 | |
| Total Sales Revenue | $70,000 | $70,000 | $112,500 | $187,500 | $440,000 |
Figure 7.7 Sales Budget for Big Bad Bikes.
The sales budget leads into the production budget to determine how many units must be produced each week, month, quarter, or year. It also leads into the cash receipts budget, which will be discussed in Prepare Financial Budgets.