Financial Planning for Sales

Financial Planning for Sales L15 Prepared by: Brian Rutherford Sales Management Overview Sales Environment 1) 2) 3) 4) 5) Planning Automation Forecasting Financial Planning Quotas Time and Territory Personal Sales Reps Supervising Sales Managers Motivating Recruiting Training Managing a sales force involves recruiting, hiring, training, supervising, compensating salespeople, motivating them to become problem solvers, and providing the proper planning and backup support so they can perform their jobs properly. Why is budgeting important? Why Budget • Three major reasons for budgeting – Planning • So the firm has a direction and goals for the future – Coordination • Sales must be coordinated with production to ensure that enough products are available to meet demand • Know how much capital is available – Control • Allocation of budgets give more control over their use (Source: Futrell) Who is responsible for setting and making sure the budget is met? Responsibility • Sales manager • District sales manager • National sales manager • Director of marketing • Committee of sales and marketing executives (source: Hite and Johnston) Objectives • Define budgeting • Methods for making the budget • Making the budget • The budget process • Understand why budgeting is important Define • Sales force budget- is the amount of money available or assigned for a definite period, usually one year. It is based on estimates or expenditures during that period and on proposals for financing the budget. (Source: Futrell) Methods for Making the Budget • Three basic methods to determine how money should be allocated – 1) Arbitrary percentage of sales – 2) Executive judgment – 3) Cost of each sales program (Source: Futrell) Making the budget (costs) • Salespeople’s expenses – Sales force compensation • Salaries • Commissions • Bonuses • Other selling payroll – Trainers’ salaries – Sales trainees’ salaries – Traveling expenses • • • • • Lodging Food Transportation Entertainment Miscellaneous • Other selling expenses – – – – – – Sales meetings and conventions Sales promotion Display or showroom expenses Catalogs and price lists Recruiting expenses Salespeople’s moving expenses • Administrative sales expenses – Sales manager's compensation – Sales managers’ traveling expenses • Communication expenses – Mailing expenses – Telephone expenses • (Source: Hite and Johnston) The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Determine top management’s sales and profit objectives • Top managers often times have the authority in approving or not approving a budget • Determine what top management goals and objectives are (Source: Hite and Johnston) The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Forecast sales and break down by Territory, product, salesperson – – – – – – – – Sales force composite Jury of executive opinion Survey of buyer intentions Trend projections Moving averages Exponential smoothing Regression Econometric models Forecast sales and break down by Territory, product, salesperson • How would you forecast for: – Territory – Product – Salespeople The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Determine functions that must Be performed • Determine who are the firms prospective customers and what do they want • How do we contact customers – How much will each method need to be budgeted for? • Phone, mail, personal selling, etc. • How do we develop the salespeople – What costs are involved? • • • • • Recruiting Hiring Training Supervising Compensating (Source: Hite and Johnston) The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Determine sales expenses (fixed vs. variable) • Fixed- costs that remain the • Variable- costs that same over a wide range of sales increase or decrease with the number of units sold – – – – – Salaries Permanent showrooms Certain taxes Depreciation leases – – – – – Commissions Bonuses Mailing costs Shipping costs Certain taxes – (Source: Hite and Johnston) The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Break-even analysis • Break-even analysis shows the number of units that must be sold in order to cover all expenses, both fixed and variable – – – – BEP= break-even point in units FC= Fixed costs P= sales price pre unit VC= variable costs per unit • (BEP) = FC/(P-VC) Break-even analysis • How many units must be sold to break-even? – FC = $30,000,000 – P= $4 – VC= $3 Break-even analysis • (BEP) = FC/(P-VC) FC = $30,000,000 P= $4 VC= $3 BEP = 30,000,000/(4-3) BEP = 30,000,000/ 1 BEP = 30,000,000 units Break-even analysis • How many units must be sold to break-even? – FC = $30,000,000 – P= $3.25 – VC= $3 Break-even analysis • (BEP) = FC/(P-VC) FC = $30,000,000 P= $3.25 VC= $3 BEP = 30,000,000/(3.25-3) BEP = 30,000,000/ .25 BEP = 120,000,000 units The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes (profit analysis) Sell budget to top management Control sales operations to meet budget Analyze price and expense changes (profit analysis) • Profit analysis • How many units must be sold to make $1,000,000? – FC = $30,000,000 – P= $4 – VC= $3 Analyze price and expense changes (profit analysis) • (Profit) = FC/(P-VC) FC = $30,000,000 P= $4 VC= $3 Profit= $1,000,000 Number of Units = (30,000,000+ Profit level)/(4-3) BEP = (30,000,000+ 1,000,000)/ (4-3) BEP = (31,000,000)/ (1) Number of Units = 31,000,000 Analyze price and expense changes (profit analysis) • How will certain actions effect the BEA and the profit analysis – Fixed expenses have decreased – Variable costs increase – Cut in certain expenses – The firm wants to make a higher return The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes Sell budget to top management Control sales operations to meet budget Sell budget to top management • The sales manager must be able to defend the budget to top management • Understand how changes will effect the firm and be able to explain the necessary steps needed to correct the change The Budgeting Process Determine top management’s sales and profit objectives Forecast sales and break down by Territory, product, salesperson Determine functions that must Be performed Determine sales expenses (fixed vs. variable) Break-even analysis Analyze price and expense changes Sell budget to top management Control sales operations to meet budget Control sales operations to meet budget • Use the budget as a benchmark to help monitor expenses • If the budget is not being met, what actions need to be taken? Summary • Why is there a need for budgeting • Responsibility • Define budgeting • Methods for making the budget • Making the budget • The budget process • Understand why budgeting is important Case 7.1 • How can the firm reach its break-even point? – A) decreasing fixed costs – B) decreasing variable costs – C) increasing price • How can the firm reach a profit of $100,000? – A) decreasing fixed costs – B) decreasing variable costs – C) increasing price