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The marketing budget is a plan for the forthcoming year for the marketing department, outlining what it hopes to achieve in terms of sales volume, sales revenue, expenditure and profit. It will often outline the month-by-month targets for the department and show the departmental personnel the objectives that they need to achieve over the next 12 months.
The marketing department must ensure that it sets a budget based on the overall objectives of the business, as well as taking into account any expected changes in the external environment (e.g. if there is expected to be an economic downturn, then this needs to be translated into the sales and revenue targets for the next 12 months).
There are several ways that a business may set its marketing budget:
- Based on the amount of finance available. The amount of money and finance that is available for the whole business will clearly affect the amount of planned expenditure within each department. The biggest source of expenditure within the marketing department is often the promotional campaigns.
- Based on previous years' budgets. Some businesses will set the forthcoming year's marketing budget based on last year's figures, including a small percentage change in each category.
- Based on the budgets of competitors. In very competitive industries (such as supermarkets) the amount spent on advertising and other promotional campaigns may be in relation to that spent by your main rivals.
- Based on the sales levels from previous years. It may be the case that a business will use a set percentage of last year's sales revenue figure for its budgetary expenditure figure for the forthcoming year.
- Based on the expected size of the product portfolio this year. If a business is planning to expand its product portfolio this forthcoming year, then the marketing expenditure budget will probably need to be set at a significantly higher level to reflect the extra money spent on the launch and advertising of the new products.
Any differences between the budgeted figures and the actual outcomes are known as a variance.
Positive (i.e. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure, or where the actual amount of money flowing out of the business is less than the budgeted figure.
Negative (i.e. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure, or where the actual amount of money flowing out of the business is more than the budgeted figure.