How Startups Create a Sales Budget
A startup sales budget provides goals for sales teams and an achievable roadmap for the business. Successful startups use a blend of market research, business analytics, and realistic projections to create budgets.
At times, running a startup can feel similar to throwing spaghetti on the wall until it sticks. Nine out of ten small businesses in the US fail due to a lack of strategic planning. Given that startup budgeting is an essential component of planning, you need a carefully designed process. However, many startups struggle to make a realistic sales budget.
Sales budget vs. sales forecast
Many business owners can’t tell you the difference between a sales budget and a sales forecast. The difference is subtle, and many may not care, but a lack of understanding can have implications that ripple through the ecosystem.
What is a sales budget?
A sales budget is your company’s sales projections over a given period of time. The calculation is simply the number of units you expect to sell multiplied by the cost per unit. It guides your sales team using achievable targets.
Estimating and managing future cash flow is one of the key benefits of sales budgeting. Projected revenue from your sales budget guides your understanding of the scale of operations, directly informing inputs of production budgets, labor budgets, and planning for administrative costs and overhead. You don’t want to run out of goods to sell because you’re budgeting lower sales.
It’s also important to be realistic, ground projections in previous sales data (if available), customer feedback, and market trends. Your sales budget should also have an appropriate time-frame.
Smaller businesses may want to keep time frames shorter, allowing for more flexibility and adaptability during periods of high growth.
Having accurate numbers will allow you to plan strategically and maximize the potential of each dollar.
What is the difference between a sales budget vs. sales forecast
If a sales budget is your annual target, your sales forecast is the estimated scorecard.
Your sales forecast breaks down the amount you anticipate selling, generally in a shorter period than the sales budget. A forecast usually does a better job of accounting for seasonal sales trends since the timeline can be weeks and months instead of quarters and years.
You need to know whether you are on track to hit the long-term goals outlined by your sales budget, and that’s where the sales forecast comes into play.
Confusing these two is problematic because you want both. The sales budget guides the overall vision you’d like to achieve, and the forecast indicates how close you are to getting there.
Given the distinction between the sales budget and forecast, you should start by making the sales budget. We’ll walk you through a step-by-step process of how to make your sales budget.
How to create a sales budget
Step 1: What information do you need to prepare a sales budget?
First, you need your time frame. Decide whether you will be budgeting monthly, quarterly, or for the year.
Then, look at any past sales data you have. How did you perform last year? What factors led to that performance? Are they likely to change?
You’ll also want to do plenty of market research. Look into public companies or other colleagues in your industry and even your competition. Seek out resources that will give you insight into customer behavior and the current state of the market. Keep in mind seasons of high and low traffic so you can budget accordingly.
Many budgeting factors will be internal. Understanding your production capacity, selling and distribution channels, product diversification, and your own sales trends drive accurate projections.
External factors also impact your sales budget. Economic conditions, technological disruption, and even government policy can influence your sales projections and should be accounted for.
Step 2: Use industry benchmarks to set your budget
Industry benchmarks are standards or guidelines for key financial metrics relevant to your area of business.
How much should you allocate to certain areas of your business? What should you spend on your marketing budget? What should your profit be per employee on your payroll?
Much like the date of your anniversary, it’s best not to guess when it comes to these questions. Industry benchmarks provide you with standards to make informed decisions, especially if you’re a startup and lack historical sales data of your own.
Here are some useful resources for finding benchmarks in your industry.
- BizStats - Offers free reports, as well as industry reports available for purchase.
- Business Expenses Survey - Information from the Census Bureau offers expense comparisons for selected industries in the US.
- Hubspot - Data accumulated from over 96,000 businesses using their CRM platform.
Examples of benchmarking would include:
- a financial firm providing investors with a comparison of financial metrics such as operating margins against industry averages
- an e-commerce business measuring fulfillment and delivery metrics against key competitors
- an IT company checking resolution rates against industry standards to understand the effectiveness of its delivery systems.
Step 3: Review sales prices and forecast revenue
Now that you understand the industry benchmarks, it’s time to look at your operations and project potential sales figures.
You can’t calculate revenue without the current selling price per unit for your entire product or service line. Don’t forget to factor in planned pricing changes such as upcoming promotions or new products.
Forecasted revenue comes from the sales price and projected number of customers and purchases in a given time. Estimates either develop from historical sales data, like sales revenue from the previous year or quarter, or industry benchmarks for startups. Calculate your revenue with the following formula:
Number of customers X average sales price X expected units purchased = Forecast Revenue
Apply this formula to whichever budget period you choose. If you want to forecast for a quarter, multiply by the number of purchases expected in one quarter.
Step 4: Get input from your sales team
Finally, run the numbers by your sales department: the girls and guys on the front lines.
While startups may benefit from budget planning and controls, fully understanding your teams and resources needed is critical.
What do the sales managers think about the projections? Can they achieve the targets outlined by the master budget? Do their pipelines and client portfolios match the projected customers in the forecast?
Salespeople have a pulse on the market and can provide invaluable information you may otherwise miss.
Remember, the master budget will most likely determine commission rates, so targets should be achievable.
Examples of startup sales budgets
Here are some example budgets which can serve as guides or templates to help you.
The first is a business that offers a single good or service at a fixed rate and allows for sales discounts. Their forecasted units fluctuate but not the price per unit.
The second example is a SaaS company with two offerings, Standard and Pro, both offered at a fixed rate. The company has historically performed strongest in the third quarter, which is factored into the budget.
Making informed and accurate sales projections helps steer your business toward a clear destination.
It may seem like quite a bit of work, especially the first couple of times you do it, but having a carefully constructed sales budget is worth the effort.
Attempting to run a business without a sales budget and forecast is a bit like embarking on a road trip without a map. You might have a few unexpected surprises, some hopefully pleasant, but you will find yourself lost in the end.
So create your map. Research industry benchmarks and market trends, break down your sales price and forecasted revenue, then run it by your team for fine-tuning.
Follow these steps and you will have an informed, realistic sales budget that will drive sales, inspire salespeople, and help take your business to the next level.