What is Percent-of-Sales Budgeting?
Percent-of-sales budgeting is a forecasting method used to set sales goals and calculate marketing and sales expenditure. This method focuses on estimating sales growth from the previous year’s results and sets goals based on the estimated growth. In other words, it is a budgeting method which uses a percentage of the projected or actual sales to set and plan for expenses.
Advantages of Percent-of-Sales Budgeting
Percent-of-sales budgeting has several advantages, including:
- The budgeting process is relatively simple, as it is based on sales figures.
- It allows companies to best use resources and set realistic goals based on past performance.
- It is an accurate and reliable measure to forecast future sales.
- It can help companies to allocate resources and plan for future growth.
Disadvantages of Percent-of-Sales Budgeting
Despite its advantages, there are some drawbacks to the percent-of-sales budgeting method, including:
- It does not take external factors into account, such as economic changes, competition, or other unforeseen events.
- It is difficult to predict changes in the market, which can lead to inaccurate budgeting.
- It requires a large amount of historical data, which may not be available in some cases.
Examples of Percent-of-Sales Budgeting
An example of percent-of-sales budgeting is when a company sets its budget for the next year based on the sales from the previous year. For example, let’s say a company had $1 million in sales in the previous year and wants to increase sales by 10%. The company could use the 10% figure to set its budget for the next year. Another example is when a company sets its budget for marketing and advertising based on a percentage of its projected sales. For instance, if a company projects sales of $2 million for the next year, it could set its marketing budget at 10% of the projected sales, or $200,000.
Conclusion
Percent-of-sales budgeting is a simple and reliable method of budgeting that can help companies to set realistic goals and allocate resources based on past results. However, it is important to keep in mind that this method does not take external factors into account, and it requires a large amount of historical data in order to be effective. For more information on percent-of-sales budgeting, please visit: