Question
Discuss the various sales budgeting approaches that you can adopt for the sales department.
Answer
The sales budget represents the planned sales and revenues that a sales department expects to accrue over a certain period.
In planning and forecasting the sales there are a variety of methods that can be used. Some of these are related to standard statistical methods of forecasting, such as a simple percentage increase on previous figures through to multiple regression models.
A more specific method is to develop the plan based on the expectations of sales personnel, for example asking them the figures that they expect to achieve. This can make use of tacit knowledge and experience that cannot be captured through calculations, but does introduce the possibility for bias and gaming behaviours.
Another method is to incorporate input from customers. This approach is most applicable in business to business scenarios where there are a few major customers. In such cases this has the benefit of sharing the knowledge of the different companies and thus gaining a wider range of views in making the predictions. A downside is that securing the cooperation of the other companies may be difficult if they feel the information is strategically important. In other cases the customer firms may not have accurate predictions of how much they would purchase, or their methods for predicting this may be sub-par.
The best way to ensure accurate sales budgeting may be to combine a multitude of approaches in order to gain the benefits of each. However, this approach would be more complex, and also require more time.
