The CEO of a small but growing sports equipment firm has just announced that sales went up significantly last year. The marketing director is happy because her budget will go up also. This indicates that the firm is using the to set the advertising budget.

percentage-of-sales approach

Explanation:

As the volume of business revenue increases, the percentage of advertising investment over revenue may decrease. The US Small Business Administration recommends between 7% and 8% if sales are less than $ 5 million a year and the net margin is between 10% and 12%.

It seems logical to determine the cost of what we invest in selling, in relation to the sales we are having, for example, the oil companies allocate a penny for each liter of gasoline they sell.

The logic is maintained if we consider that we will never get out of what the company can really afford, our relationship with CFOs will be one of love at first sight, we look great in presentations to management and promote stability.

Of course it does have bad points, and the first is that its approach is wrong because marketing and communication are not necessarily linked to sales.

The percentage of sales approach

Explanation:

The percentage-of-sales method is used to develop a budgeted set of financial statements. Each historical expense is converted into a percentage of net sales, and these percentages are then applied to the forecasted sales level in the budget period.  

The next budget of the firm will therefore be determined based on the percentage of sales that has been made in the previous trading year.