Budget Revenue Basis

Which Sales Method for establishing your budget revenue basis?

Your budget revenue basis can be determined as a percentage of past sales, of estimated future sales, or as a combination of the two:

 1. Past Sales. Your base can be last year’s sales or an average of a number of years in the immediate past. Consider, though, that changes in economic conditions can make your figure too high or too low.

 2. Estimated future sales. You can calculate your advertising budget as a percentage of your anticipated sales for next year. The most common pitfall of this method is an optimistic assumption that your business will continue to grow. You must keep general business trends always in mind, especially if there’s the chance of a slump, and hardheadedly assess the directions in your industry and your own operation.

 3. Past sales and estimated future sales. The middle ground between an often conservative appraisal based on last year’s sales and a usually too optimistic assessment of next years is to combine both. It’s a more realistic method during periods of changed economic conditions. It allows you to analyze trends and results thoughtfully and to predict with a little more assurance of accuracy.

 Unit of Sales

In the unit-of-sale method you set aside a fixed sum for each unit of product to be sold, based on your experience and trade knowledge of how much advertising it takes to sell each unit. That is, if it takes two cents’ worth of advertising to sell a case of canned vegetables and you want to move 100,000 cases, you’ll probably plan to spend $2,000 on advertising them. Does it cost X dollars to sell a refrigerator? Then you’ll probably have to budget 1,000 time X if you plan to sell a thousand refrigerators. You’re simply basing your budget on unit of sale rather than dollar amounts of sales.

 Some people consider this method just a variation of percentage-of-sales. Unit-of-sales does, however, probably let you make a closer estimate of what you should plan to spend for maximum effect, since it’s based on what experience tells you it takes to sell an actual unit, rather than an overall percentage of your gross sales estimate.

 The unit-of-sales method is particularly useful in fields where the amount of product available is limited by outside factors, such as the weather’s effect on crops. If that’s the situation for your business, you first estimate how many units or cases will be available to you. Then, you advertise only as much as experience tells you it takes to sell them. Thus, if you have a pretty good idea ahead of time how many units will be available, you should have minimal waste in your advertising costs.

 This method is also suited for specialty goods, such as washing machines and automobiles; however, it’s difficult to apply when you have many different kinds of products to advertise and must divide your advertising among these products. The unit-of-sales method is not very useful in sporadic or irregular markets or for style merchandise.

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