The production budget is a quantity budget. It determines the number of
units of a business's product that should be produced to meet the demand of its customers based on the sales forecast and sales budget.
Having a process to determine how much of a product needs to be made to meet the demand is critical for a business that sells a physical product.
Too much and too little inventory on hand can negatively affect your bottom line. Too much inventory means you may not have enough cash to invest in other critical areas of your business because your cash is tied up in excess inventory, while too little inventory can cause customers to find the product elsewhere, which may cost you that customer's business forever.