SALES BUDGETING IS THE BLUE PRINT FOR SALES-THE CONCEPT, OBJECTIVES AND
PRINCIPLES
1. The Concept: Sales budget is a blue print of sales. It is an estimate of sales volume, revenue earning, selling expenses and net profit. The real uncertain data, therefore, in budgeting process, is the sales volume. Sales budget starts with sales volume objective which is based on sales forecast.
Top management involvement is a pre-requisite for sales budgeting.
2. The Objective: Following are some of the objectives of budgeting:
1.
To focus attention of management on sales opportunities, sales objectives, and sales quotas to bring about reasonable performance level.
2.
To commit reasonable financial investment and funds to attain the business objectives.
3.
To assist cooperation between various departments in the organisation like production, finance, marketing, sales, advertisement, publicity etc.
4.
To balance between sales efforts, sales expenditure, sales volume and sales performance as per plan .
5.
To provide means of feedback and. control of efforts and performance against planned programme and tasks.
6.
To improve business performance to attain and sustain competitive advantage by identifying profitable product mix, marketing areas, existing customer regimens and prospects.
7.
To evaluate objectively the performance of individuals in sales force and encourage them through awards and rewards.
3. The Methods: Basically there are two broad classifications of methods of preparing budgets.
• Evaluate need against affordability
• Evaluate sales volume against profitability
4. Time Horizon: By and large budgets are prepared for a period of one year. In some companies budgets are prepared for longer periods like 5 years or more.
5. Principles: Following are the principles for successful budgeting:
• Parity between authority and responsibility.
• Delegation of authority and accountability.
• Proper accounting system to identity performance by product-wise, by territory-wise, by customer-wise and by sales person-wise.
• Ensure planning premises (assumption) are made based on accurate information obtained from dependable sources.
• Sales forecast is reliable
FORM AND CONTENT OF BUDGET-SALES VOLUME SECTION
1. Sales Volume and Revenue: Basically sales budget consists of forecast of sales volume and profit. From sales volume we derive sales revenue.
Having estimated sales revenue, we estimate net profit by reducing the expenses from sales revenue. Thus sales budget mainly consists of following sections:
• Sales volume section
• Sales expenses section
2. Sales Volume: Sales volume section is further divided into various sub sections. Following are the sub-sections: (1) Product-wise sales (2) Regional-wise sales (3) Quarter-wise sales and (4)
Customer (Account)-wise sales.
3. Form and Content: The form and content of sales volume section of sales budget are:
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(a) Product-wise sales volume contributed by various geographic region/territories
(b) Regional sales are later broken down to quarter-wise sales for each region
(c) A further breakdown of sales is made by arranging customer accounts wise sales of products for each quarter for all quarters in all regions.
4. Use of Computer: Use of computers is made which display each table, so that proper planning of the budget is possible. This is a pre-requisite when data is voluminous and manual manipulation is not feasible.
FORM AND CONTENT OF BUDGET-SALES SECTION BUDGETING IS THE BLUE PRINT
FOR SALES-THE CONCEPT, OBJECTIVES AND NATURE
1. The Concept: We know that net profit is obtained from the equation:
Net Profit = Sales Revenue – Expenses
"Strategic marketing investment" is a new concept in which initial expenses incurred on marketing is considered as an investment for future sales. Sales budget must therefore, take into consideration short-term and long-term sales plans in estimating sales expenses.
2. Method of Estimating Sales Expenses: Deciding how much to spend on field sales activities is, one of the most difficult tasks in sales budget. Following methods are used here:
(a) Historical data method: In this method, the expenses of previous/last year form the basis.
It has many errors/limitations as it does not take care of customer needs, sales potential, company resources, and changes in market conditions including competitive forces.
(b)
Percentage of sales method: Here it is assumed, that industry standards of sales expenditure are available under various heads
(c) Standard costs method: Standard costs method is easily applied in production activities.
However, 'standard cost' for various sales and distribution activities are not fully developed.
Whenever standards are available it is easy to estimate selling expenses in the budget based on the quantum of such activities of salesmen in each territory.
3. Use of Break-even Analysis is Sales Expenses: In this method the sales expenses are listed down under two broad heading viz. (1) Fixed Expense and (2) Variable Expense. Having arranged these, a Break-Even Chart is drawn in the standard manner.
SALES BUDGETING-IMPORTANCE AND APPROACH
1. Importance of Sales Budget: Company budgeting starts with sales budget because, the revenue is earned by sales department. Input from sales budget is essential for marketing department to prepare their budget. Production department needs the expected sales to work out their manufacturing budgets. Finance department needs sales budget in preparing the (a)
Operating budget (like production budget, purchase budget etc.), (b) Financial budget (like fund flow, cash flow) and (c) Capital budget.
2. Budgeting Approach: There are two approaches in the budgeting process i.e.
(a) Top-Down Approach: Here top management sets the objective in sales in terms of product mix, sales volume and profit.
Based on this objective, a plan indicating expected sales volume, sales expenses and net profit is prepared.
(b) Bottom-Up Approach: In this approach, head of each organisation unit or section including even an individual salesman prepares a sales objective and a plan to meet such objective given in terms of sales volume, sales expense and possible net profit.
SALES BUDGETING-IMPORTANCE AND APPROACH
1. The Procedure: Following are the procedure and steps in preparing sales budgets. This is based on bottom-up approach discussed above. In this case each management level within sales department approves budget for which it is responsible by incorporating them into its own budget and submit the same for approval of the next higher level. These budgets are supported by unit plans of sales for next plan period, in terms of product wise quantity of expected sales, estimated sales expenses month-wise/quarter-wise, and justification of expected sales by
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3 identifying the customer segment based on customer accounts. On approval of Board of
Directors, with or without modifications, the final approved budget is, later, sent down to lower levels, to each of the line and staff department, for implementation.
2. Capital Rationing within Marketing Department: Marketing Department combines budgets received from all its constituents departments like sales, advertisement, customer service, public relations and others. The head of Marketing Department allots the funds to each of his subordinate departments, based on the value and priority of their respective proposals. This is called capital rationing.
3. "Selling" Sales Budget to C.E.O.: Head of Marketing must convince the CEO/Top
Management of their budgetary proposals.
This is called the "selling process” of convincing top management. Quality of presentation of budget proposal to the top management is the last process and perhaps, the most effective means of getting Sales Budget approved without serious cuts.
SALES BUDGETS AS A CONTROL DEVICE
1. Budget is a Plan: Preparation of budget is a planning activity. Once the sales budget is approved, each and every sales activity there in, is defined in terms of "time-frame" and "cost-frame" by the top management. Thus, sales budget serves as a "standard" or "quota" of the various activities of sales department.
2. Budget Assist Managerial Control of Activities:
(a) By fixing the standard of "time frame" and "cost frame" of various sales activities, the budget now provides the guidelines for individual managers to act.
(b) It also provides them with a useful "control" mechanism when activities are initiated and implemented.
(c) Wherever time or cost overrun in noticed on any budgetary activity, the laid-down standard serves as a useful "alarm signal", for initiating corrective actions.
(d) Assist Manager to become "self controlled" and "self directed."
3. Budget Assist Top Management Control and Performance Evaluation: Budgeted sales and expenses are broken down into smaller periods like weeks and months. MIS is introduced on these data so that higher level managers are appraised on performance, on sales and expenses at regular intervals, say, in every week/month. When performance shows short fall in case of budgetary sales or cost overrun in terms of budgetary expenses, necessary control mechanism is initiated and targets of sales and expenditure envisaged in budgetary plans are achieved.
4. Correction on Errors in Budgets: Errors are to be investigated thoroughly to identify causes under (a) Avoidable causes and (b) Unavoidable causes.
In order to overcome these problems some management resort to (a) Alternative Budgets (b)
Flexible Budgets and (c) Variable Budgets.
SALES QUOTA-THE CONCEPT AND OBJECTIVE
1. Definition: "For sales manager, quotas are keys, to measure in planning, control and evaluation of sales activity to increase selling efficiency of the company."
2. Nature and Scope: Quotas are useful in preparing sales planning, sales control and evaluation of sales performance of individuals, organisations units and middlemen like agents, wholesalers and dealers.
3. Objectives: (a) Provide Quantitative Standard of Sales Performance (b) Provide Objective
Control Mechanism c) Motivate Sales Persons and (d) Competitive Advantage
SALES QUOTA-AN INTEGRATING FORCE BETWEEN MARKETING, PRODUCTION AND
FINANCE FUNCTIONS
1. Introduction: In order to understand the procedure for fixing sales quota, it is necessary we understand the relationship between sales forecast, sales budget and sales quota.
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2. Relationship between Sales Forecast, Sales Budget and Sales Quota: Sales budget need sales volume objective for each territory which is derived from sales forecast. Budget also needs sales expenses based on which the net profit is estimated. Quotas, derived from sales budget also need information on contribution and sales expenses of each territory. These information make, quota an effective device for controlling sales efforts sales expenses and evaluating sales performance.
3. Procedure in Preparing Quota: From sales volume objective we estimate gross profit contribution. From historical data we also estimate the sales expenses. From these two data we derive territory-wise net profit objective. Net profit objective and sales expenses form the basic data required for preparing sales budget and sales quota.
Sales quota assist control and evaluation of sales performance of sales force, regional/district sales office etc.
4. Conclusion: Sales forecast fix the scope and scale of operation of the firm like the plant capacity, production quantity, manpower requirement in various areas of activities and also decides the requirement of funds both for fixed capital and working capital.
TYPES OF SALES QUOTA
1. Classification : Quotas are classified under (a) Sales Volume Quota (b) Budget Quota (c)
Activity Quota and (d) Combination Quota
2. Sales Volume Quota:
(a) The Concept: Sales volume quota is easy to understand, identify and operate on. However, too much importance on sales volume may be counter productive.
(b) Types: Realising these, variations available on sales volume quotas are (i) Sales Volume Quota in Terms of Money (ii) Sales Volume Quota in Terms of Unit (iii) Sales Volume Quota in Terms of
Point Sales
(c) Methods: (i) Derived from Territorial Sales Potential (ii) Derived from Total Market
Estimates (iii) Quota based on Historical Data (iv) Quota based on Executive Judgement (v)
Quota based on Field Sales Force Views (vi) Quota based on Compensation Plan:
3. Budget Quotas: Budget quotas convey the message to the sales persons that their job is not merely to get sales orders but also to promote sales which improve company profits.
Budget quotas specify (i) Expense Quotas (ii) Gross Margin Quotas (iii) Net-Profit Quotas
4. Activity Quotas
:
Sales management consists of a number of activities which are identified by sales budget fixing standards in terms of "time-frame" and "cost-frame" for such activities.
Activity quotas are setting standard of (1) Number of sales-call (2) Time period of each call (3)
Frequency of call (4) Number of new accounts per each period say per month (5) Time and expense for each demonstration/seminar and such other non-selling activities.
5. Combination Quota-Point System: Here performances against quotas are measured in percentages which are known as "points." This system has two variations ( a) Overall Point Score
Quota System (b) Product Line Point Score Quota System
COMBINATION QUOTA SYSTEM
1. Types: Combination quota, control performance of both selling and non-selling activities.
2. Overall Point Score Quota System: Individual performance of salesmen is determined based on selling and non-selling efforts in an overall manner.
4. Product Line Point Score Quota System: Sales efforts vary with different types of product line. In product line this discrimination of efforts between the products is essential.
ADMINISTRATION OF QUOTA SYSTEM
1. Introduction: Quota is a control mechanism and is therefore, naturally resisted by sales persons. Efficient administration of quota is possible when these are rationally conceived and innovatively implemented with participation and support of the sales force.
2. Rational Consideration: Rational considerations of design of quota system are (a) Realistic
Quota (b) Accurate (c) Fairness
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3. Emotional Support and Motivation : Following steps assist these aspects are (a) Participation
(b) Pro-active control (c) Continuous feedback and (d) Incentive systems.
(a) Participation: Participation assists transparency of operation, education and training of sales persons, and implementation of quota system. The chances of implementation of sales programme by the sales persons are better, if such programme are conceived and designed by the same persons.
(b) Pro-active Control: In proactive system of control sufficient time is given to the field force to set things right on selective basis, where deviations of performance has gone beyond the acceptable limits. Here control is based on the "principle of management by exceptions."
(c) Continuous Feedback: Feedback of performance serves as a motive factor. Wherever possible the sales persons be encouraged, advised, guided and supported to meet their quota with mild warning if inescapable.
(d) Incentive System: Incentives are positive motivators.
The incentive schemes of achieving the quotas must be designed to meet the above expectations of sales persons. This will contribute towards increasing their motivation levels.
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