NFIB

Budget Using Sales Probabilities
02/ 26/ 2003

by Jeffrey Moses

Many small business owners spend a tremendous amount of time and energy calculating upcoming budgets. Budgeting is most accurate and helpful when based on realistic cash-flow projections. Unfortunately, cash-flow projections are sometimes based on nothing more than a sales manager's intuition. Without accurate cash-flow projections, budget calculations are all but meaningless--and may result in frustration and confusion if the allotted funding is suddenly not available.

Better than using a single-figure sales projection would be discussing best-case, worst-case and probable sales projections.

For instance, if a sales manager says that sales of $100,000 are likely for the upcoming quarter, the owner should ask about the best-case and worst-case projections. After looking through department records and talking with staff about upcoming sales activity, the sales manager might determine that the best-case projection would be $150,000 and the worst-case projection would be $75,000.

It is then necessary to determine if sales are more likely to move upward or downward from the expected projection of $100,000. After analysis, it may be determined that it's much more probable that sales would be higher than $100,000, and the company owner could be more confident when using the $100,000 figure as the baseline for budgeting.

However, if the sales manager and other sales staff feel that there is a higher probability that sales will be less than expected, the owner should consider basing budgets on the $75,000 figure to be on the safe side.

Extremely conservative owners might consistently base budgets on the worst-case sales projection. During periods of economic uncertainty, this is a prudent course to take, though it could limit a company's growth by placing unnecessary limits on marketing, sales and operational expenditures. This is especially true when actual sales figures regularly meet or exceed the probable range.

Basing budget decisions on probability allows for greater accuracy, assuring the ideal blend of cost-cutting and operational funding.

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