Page 178 - Finance for Non-Financial Managers

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The Annual Budget: Financing Your Plans
to budget for revenues depends in large measure on the nature
of the business, its history, and the buying patterns of its cus-
tomers. Figure 10-1 shows some ideas and the kinds of busi-
nesses for which they might make sense.
Sales Scenario Ideas for Estimating Annual Revenues
1. The company sells its Identify the top 50 (or X) customers
products to an identifiable list representing 60% or more of the company’s
of customers and there are business and contact them for their buying
good relationships between intentions for the coming year. Include an
Sales and the customers. estimate for the remainder, based on the
trends seen in the first group.
2. The historical sales pattern Obtain the most valid forecast of that
has closely followed some indicator for the coming year and base the
indicator of growth that’s still sales estimate on the same relationship that
available and still reasonably has existed in the past year. If the relationship
valid, e.g., airline passenger has changed over the years, weigh the most
miles, housing starts, auto recent periods most heavily in your estimates.
sales, defense spending, per-
sonal income statistics, etc.

3. The company has been able Project sales as a percent of maximum
to sell all it can make in a capacity to produce, recognizing that 100% is
strong market and it’s feeling not attainable, but that capacity will strongly
the pinch of reaching its affect a company’s ability to deliver. In this
productive capacity. case, the production managers should also be
part of the estimating team.
4. Customers perform work Similar to 1 above, except that the estimates
under long-term contracts are likely to be more reliable. Still, history
with their customers, so they tells us even these are uncertain, as delays by
must line up supplier others can cause postponement or even
commitments to enable them cancellation. This is, after all, still just an
to project profitability on estimate.
their performance.
5. Sales have grown at a rate This is the no-brainer estimate, providing
that has been reasonably nothing is expected to change in the coming
consistent from year to year year. Use the same growth rate, perhaps
and nothing in the market is increased by whatever the company’s
expected to change. managers think they can do to boost results
further.

Figure 10-1. Estimating Revenues