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By: Steve
Subject: Finance

Why is the preparation of a sales forecast one of the earliest steps in preparing a master budget? ...[Show More]

4 years ago

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Sales forecasting is the process of estimating future revenue generated by the sales team for a business. It is the prediction of the number of sales of a product or service in the future. Oftentimes this prediction is based upon past sales performance or the product or service. (Investor Words, 2015)Sales forecasts are done early in the preparing of the master budget because they provide a precise and meaningful visibility of revenue-generating activities and this will be used in the planning, budgeting and risk management. When a firm has accurate sales forecasting gives them the opportunity to identify threats and weaknesses of the entire process and alert executives on time, rather than after the fact. According to Anthony & Govindarajana (2007) Sales forecast is an early step in the preparing of a budget process because sales forecast works as a management control system. The sales forecasts provide an estimated future sales volume which gives indicators to the purchasing, the production, and the logistical and financial departments. This information obtained through the sales forecast can then be incorporated in the preparation of the master budget. Accuracy of a budget can therefore be achieved. Sales forecast is one of the earliest steps in preparing a master budget because Companies make financial decisions based on the forecasts. Sales forecasting predicts sale, (Florance and Sawicz, 1993). Having a sales forecast give the company an idea of the cash flow. Having cash flow insight will allow a firm to budget their cash flow needs accurately and cost of production is also estimated giving an overview analysis which will be used in the master budget.

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