Financial Planning for Sales

L7
Prepared by: Sherif AL Kammash

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)

Salespeoples 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 Salespeoples 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 managements 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 managements 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 managements 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 managements 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 managements 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 managements 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 managements 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 managements 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 managements 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 managements 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