First of all state what a budget is. It is a financial plan for the coming year.
A production budget is what it says. It is a budget which works out the number of units needed to be produced in order to satisfy the right quantity demanded by customers. i.e. BMW need to produce 40 cars a day at their Augsburg factory to meet demand. A production budget follows the sales budget, as you would need to know the predicted sales in order to then plan how to allocate resources such as raw materials, machinery and labour.
A sales budget is more like what we normally look at. It is a budget which plans the predicted number of customer sales over the year. Sales can be divided into cash (upfront) and credit (paid for later).
There are generic similarities for both (and indeed any budget).
· Budgets allow you to compare the real or actual figures with the planned ones.
· Budgets are also used as a motivational tool for employees to help reach targets.
· Budgets can help highlight areas where high costs are being incurred and have to be reduced.
· Budgets are normally stuck to religiously so if a department is heading over budget they will have to control their expenditure.