Question

How would a company be affected by budget strategy based on personal goals rather than market analysis? How might this affect sales dollars, sales volume, and profits?

Answer 1

Budgets are prepared to estimate the sales, cost, profits etc which the company can earn in ideal conditions.

Ideal condition includes analysis of both micro and macro factors of the economy. Micro factors are company specific and can be controlled by the entity, whereas macro factors will not be under the control of entity which may include recession, inflation etc.

If the budgets are designed as per personal goals, and market conditions are not considered, then the estimates can go wrong if the macro factors of the economy changes. This might highly reduce or increase the profits and sales of the company.

For example : A company engaged in automobile sector creates a budget of sales for 200,000 units of cars and a profit of 10% on sales, i.e 20,000 only by considering the micro factors. If during the year the industrial estimate for sale of automobiles drops, then the company will not be in a position to achieve it's target as there will be lesser demand for the product. Thereby reducing it's actual sales and profit.