Jane was interested in starting a business which would provide office supplies and a variety of services for small businesses in the area. She did an environmental analysis for a marketing class, and found that this idea does hold good potential for success. Now she wants to write an initial marketing plan as part of a proposal to obtain a bank loan.
When budgeting for promotional expenses, she started to think about whether she should do a lot of advertising and direct mail to promote her business or should instead use a salesperson to promote the business A salesperson could be involved in some important customer service functions as well. If she decides to hire a salesperson, she is additionally faced the ssue of whether to pay salary or commission or some combination.
What should she do? How should she put together a proposed promotional budget in her business plan?
OBJECTIVE AND TASK BUDGETING
Note before going on to these:
To the organization, salary is a fixed cost, commission is a variable cost, and bonuses and such are often semi-variable costs. A salesperson's expense account, while not compensation, is also a consideration in budgeting for the cost of running a salesforce.
number of salespeople needed =
number of sales calls/period =
EXAMPLE: WORKLOAD STRATEGY
Bob's Kitchen Cabinet Company
How many salespeople do we need?
If two left last year, what is the turnover ratio? Is this an acceptable level of turnover?
We must make (3 X 900) = 2700 sales calls on regular custumers during the year. We must also make (3 X 300) = 900 calls on prospects during the year. Each salesperson can spend six hours per day on activities asociated with making these calls, and so spends (5 X 6) = 30 hours per week making these calls. If salespeople make, on average, 24 sales calls per week, then they must spend an average of (30/24) = 1.25 hours in traveling to and visiting each customer or prospect. The total time required to do these selling activities for the entire organization is, then, (1.25 hours) X (2700 + 900 sales calls) = 4500 hours. If a single salesperson can spend about 30 hours per week on selling activities, and works approximately fifty full weeks per year, then each person can devote 30 X 50 = 1500 hours toward these selling activities. The total number of people needed to perform our selling activities, then, is (4500/1500) = 3.
Bob's Kitchen Cabinet Company
What is our sales forecast?
If we have 3 salespeople who are paid a $5000 base salary plus 5% commission, what are our expected expenditures in salesforce compensation for next year?
If we placed a job ad in the newspaper to replace a salesperson who quit, what could we realistically advertise as the expected income potential of our individual salespeople?
This is a special case in which market potential and market sales are likely to be the same - this would generally NOT be the case in other types of business. If we have a 20 percent share, then our sales are expected to be (.2 X 5,000) = 1,000 units, or ($1500 X 1000) = $1,500,000 in total revenue. We must budget (.05 X $1,500,000) = $75,000 for commissions, or $25,000 per salesperson. We must also budget (3 X $5,000) = $15,000 for total salaries. Our total budget for compensating our salesforce, excluding other expenses and assuming this level of sales, is ($75,000 + $15,000) = $90,000. Realistically, we could advertise that individual salespeople are paid a base of $5,000 and 5% commission, with expected annual earnings of $30,000.
PRACTICE EXERCISE - click here for more practice