The master budget process starts with the sales department, which estimates expected sales for the coming period. The sales budget uses this information to project total sales revenue.
Consider the case of Forever Tuna, a company that processes and cans tuna fish. A single case of Forever Tuna sells for $100. Here are the Sales department’s projection of the next four quarters’ sales.
To create a sales budget that projects total sales for the next year, multiply expected unit sales by the sales price as shown.
A draft of the master budget may indicate that the sales budget is too low to make the company profitable. So make the sales department rework the sales budget, perhaps increasing prices and lowering volume. Then redo the whole master budget all over again to find out what will happen.
In fact, you’re going to need to do and redo the budget until you create a budget based on realistic assumptions that generates manageable cash flow and maximizes net income. This document becomes your road map, so you need it to be accurate and to mark a clear route to your destination.