Budget Compliance–Sales is a simple ratio to understand. This is simply a percentage that compares the budgeted sales with the actual sales.
I used to go to the local amusement park when I was little and play that game where you throw the baseball at the catcher’s mitt two times and then have to guess the speed of the third throw to win a prize. Budget Compliance–Sales is like that game. I will explain this more in the next post.
The very first step in creating a budget is to determine sales volume. A company can use both historical data and expectations based upon marketing and trends in the industry and economy in order to come up with a number.
This number will be used to set the rest of the budget and to decide on allocation rates. This number is the very beginning for future planning.
The most important thing to remember about this number is that it is a guess. You may support your guess with charts, graphs and historical data and trends, but ultimately it is a guess.
Because it is a guess, a company must realize that their end sales will most likely be different from the guess. This ratio tracks how much difference there is in the guess and the actual for the year.
Here is the equation: Actual Sales / Budgeted Sales * 100 = Budget Compliance–Sales
When going through the criteria to determine who we want to win this fight, it is important to note that the actual number is going to be better than the guess, so we want the top to win. This will mean a percentage closer to 100% is going to be best, and a number over 100% is better than a number under 100%.
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