Sales Budget (SDM III)

SALES & DISTRIBUTION
MANAGEMENT
Sales Budget
(Module III)
By P VIKRANTKUMAR, AGBS, HYD
Sales Budget
Sales Budget predicts sales quantities
and selling prices to determine the amount

of sales revenue the company expects to
generate and the likely selling expenses.
What factors do companies take into
account when they decide how many units

they can sell and what price to charge for
each unit?
1.
2.
3.
4.
5.
Customers tastes
Production and advertising strategies
Competitors
Production capacity
Changes in the economy
Meaning And Importance Of

Sales Budget
A sales budget is a financial plan depicting how
resources should best be allocated to achieve the

forecasted sales.
The Sales Budget is a blueprint for making profitable
sales.
The purpose of sales budgeting is to plan for and control
the expenditure of resources (money, material, people
and facilities) necessary to achieve the desired sales
objectives.
Sales forecast and sales budget are therefore intimately
related as much as that if the sales budget is
inadequate, the sales forecast will not be achieved, or if
the sales forecast is increased the sales budget must be
increased accordingly.
Purpose Of The Sales

Budget
A Planning Tool
An Instrument of Coordination
A Tool for Control
Benefits of Preparing the

Annual Sales Budget
The following are benefits of preparing the
annual sales budget:
ensure a systematic approach to allocation
resources
develop the sales managers knowledge of
profitable resource use
create awareness of the necessity of
coordinating selling efforts with other
divisions of the company
establish standards for measuring the
performance of the sales organization
obtain input from all areas of the company
Types of Budget
Financial statement that outlines firms intended
actions and the resulting cash flow
consequences. Most sales budgets covers a
period of one year, but they are often broken
down into quarterly or even monthly targets.
Sales budget projection of revenue computed from
forecast unit sales and average prices.
Selling expenses budget approved amount that
the department will spend to obtain the revenues

projected in the sales budget.
Profit budget merged sales budget and the selling
expense
budget
determine
By
P VIKRANTKUMAR,
AGBS,to
HYD
gross profit.
Budgeting Approaches
Top-down budgeting
Bottom-up budgeting
Top-Down Budgeting
Top Management Sets the
Spending Limit
The Promotion Budget Is Set to Stay

Within the Spending Limit
Methods for Setting Sales

Budgets
1. The affordable method
2. Historical Method
3. Percentage of Sales
4. Competitive parity
5. Return on investment (ROI)
1. The Affordable Method

Management determines what to spend on
selling after accounting for the cost of good

sold and the desired profit level. It is common
among small firms and certain non-marketingdriven large firms.
Companies using this approach dont value
advertising as a strategic imperative.
Logic: we cant be hurt with this method.

Weakness: it often does not allocate enough
money.
2. Historical Method
Historical information is the source for this
common budgeting method.

The inflation rate and other marketplace
factors can be used to adjust the selling

expenses.
This method, though easy to calculate,
has little to do with reaching the Sales

objectives.
3. Percentage-of-Sales
Method
The funding level is found by multiplying the sales revenue by a
given percentage. Budgeting is based on anticipated rather then

historical revenue.
It compares the total sales with the total advertising budget during the
previous year or the average of several years to compute a percentage.

Two steps
Step 1: past advertising dollars/past sales = % of sales.
Step 2: % of sales X next years sales forecast = new advertising budget.
Advantages:
Financially safe
Reasonable limits
Stable
Disadvantages:
Reverse the cause-and-effect relationship between advertising and sales.
Misallocation
Difficult to employ for new product introductions.
Sales
Budget AGBS, HYD
By P VIKRANTKUMAR,
4. Competitive-Parity
Method
This method uses competitors budgets as
benchmarks and relates the amount invested in

advertising to the products share of market.
Sales budgeting method based on the competitive
practices in an industry. They refer to either a

specific competitor or the industry average.
Logic: share of media voice share of consumer
mind share of market.

Share of media voice: the advertisers media
presence.
The actual relationship above depends to a great
extent on factors such as the creativity of the
message and the amount of clutter in the
marketplace.
Competitive-Parity Method
Advantages:
Take advantage of the collective wisdom of
the industry
Spending what competitors spend helps
prevent promotion wars.
Disadvantages:
Companies differ greatly.

There is no evidence that budgets based on
competitive parity really suits the

requirement.
5. Return on Investment
(ROI)
Some sales managers have begun to use this
financial management concept to chose between

alternative courses of action. ROI is determined by
dividing net income by total assets employed to
earn the income.
In this method, advertising and promotions are
considered investment, like plant and equipment.
Thus, the budgetary appropriation leads to certain
returns.
ROI has received a great deal of attention by
practitioners over the past few years, with many
still disagreeing as to how it should be measured.
While the ROI method looks good on paper, the
reality is that it is rarely possible to assess the
By P VIKRANTKUMAR,
AGBS,by
HYD the promotional effort at
returns
provided
least as long as sales continue to be the basis for
Bottom Up Approach
Objective and task method: Budget
allocation is based on the objective of

the firm, tasks necessary to achieve
those objectives, and the expenses
related to those tasks. It is known as
zero-based budgeting.
Sales Budgeting
Procedures
1. Situational Analysis sales managers have to look at the
magnitude of past differences between budgeted and actual

figures and the reasons for these differences.
2. Identification of Problems and Opportunities the

actual potential threat and challenges has to be assessed and
addressed to determine the probabilities of occurrence their
impact.
3. Development of Sales
to forecast sales, using one
Projections are made about
territory, product or type of
units and dollars.
Forecast manager is equipped

of the various methods.
the anticipated levels of sales by
account. It is expressed both in
4. Formulation of Sales Objectives once the forecast has

been developed, sales force has to be told what sales target to
strive and what objectives to pursue.
Sales Budgeting
Procedures Cont.
6. Specification of Resource Requirement the resources
that will be required to implement the specified activities and
achieve the objectives.
7. Completion of Projections here all the input and
requests from various units of the sales function are
assembled and tied into a comprehensive package.
8. Presentations and Review present and defend its sales
budget proposal to the management.
9. Modification and revision sales managers have to
engage in a series of compromise sessions. Here the sales
targets and budgets might be adjusted by the higher
management, reflecting both to the needs of the corporation
and the true potential of the marketplace.
10.ByBudget
approval
final levels are eventually approved
P VIKRANTKUMAR,
AGBS, HYD
and authorized for both the sales and the selling expense
WHAT IS A SALES TERRITORY?

A sales territory is composed of a group of
customers or a geographic area assigned to
a salesperson.
Major Reasons / Benefits of Sales

Territories
Increase market / customer coverage
Control selling expenses and time
Enable
better
performance
evaluation
of
sales
Improve customer relationships

Increase sales force effectiveness
Improve sales and profit performance
force
Procedure for Designing Sales

Territories
1. Select a basic geographical control unit
2. Find location and potential of present and
prospective customers within control

units*
3. Decide basic territories by using
Build-up method,
or
Break-down method
4. Assignment
of Sales personnel to
territories
*Unnecessary & expensive for consumer
products
Select Basic Control Units

States
Counties
Cities and zip-code areas
Metropolitan statistical areas
Trading areas
Major accounts
A combination of two or more
factors AGBS, HYD
By P VIKRANTKUMAR,
Procedure in Build-up
Method
Decide customer call frequencies
Calculate total customer calls in each
control unit
Estimate workload capacity of a
salesperson
Make tentative territories
Develop final territories
Objective is to equalise the workload of

salespeople
Procedure in Breakdown
Method
Estimate company sales potential for total
market
Forecast sales potential for each control
unit
Estimate sales volume expected from each
salesperson
Make tentative territories
Develop final territories
Objective is to equalise sales potential of

territories
Assigning Salespeople to
Territories
Sales Manager should consider two criteria:
(A)Relative ability of salespeople
()Based on key evaluation factors:
(1) Product knowledge, (2) market knowledge,

(3)
past
sales
performance,
(4)
communication, (5) selling skills
(B) Salespersons Effectiveness in a Territory

()Decided by comparing social, cultural, and
physical characteristics of the salesperson

with those of the territory
()Objective is to match salesperson to the
territory
Management of Territorial
Coverage
It means: How salesperson should cover
the assigned sales territory

It includes three tasks for a sales manager:
) Planning efficient routes for salespeople
) Scheduling salespeoples time
) Using time-management tools
Routi
ng
Routing is a travel plan used by a salesperson
for making customer calls in a territory

Benefits of or Reasons for routing:
) Reduction in travel time and cost
) Improvement in territory coverage
Importance
of
routing
depends
on
the
application:
) Nature of the product Important for FMCG
) Type of jobs of salespeople Important for
driver-cum-salesperson job, but creative

selling job needs a flexible route plan
Procedure for Setting up a

Routing Plan
Identify current and prospective customers on a
territory map
Classify each customer into high, medium, or low
sales potential
Decide call frequency for each class of customers
Build route plan around locations of high potential
customers
Computerized mathematical models are
developed
Base
C
patterns are:
(B) Commonly used routing
1
B
B
C
5
C
4
C
3
C
2
Straight line / Hopscotch
Circular
Clover
Leaf
Schedul
ing
Scheduling is planning a salespersons visit time
to customers. It deals with time allocation issue

How to allocate salespersons time?
) Sales manager communicates to salesperson
major activities and time allocation for each
activity
) Salesperson records actual time spent on
various activities for 2 weeks
) Sales manager and salesperson discuss and
decide how to increase time spent on major
activities
Companies
specify call norms for current
customers, based on sales and profit potentials,
and also for prospective customers
Management
Tools
To help outside salespeople* to manage their
time efficiently and productively, the tools
available are:
) High-tech equipment like laptop computers
and cellular phones
) Inside
salespeople to provide clerical
support,
technical
support,
and
for
prospecting, and qualifying, as they remain
within the company
) Outside salespeople can then spend more
time getting more orders & building
relationships with major customers
*Outside salespeople travel outside the
organisation
Sales Quota
Sales Quota is a sales goal assigned
to a sales person, region or a team.

They are usually derived from the sales
forecasts. Sales goals and objectives
sought by management.
Sales
Quotas
What are Sales Quotas?
) Sales quotas are sales goals or targets set by a
company for its marketing / sales units for a time

period
) Marketing / sales units are regions, branches,
territories, salespeople, and intermediaries
) Generally, company sales budget is broken down to
sales quotas for various marketing units
Objectives of Sales Quotas
) To use quotas as performance standards or
performance goals
) To control performance
) To motivate people by linking quotas to compensation
plans
P VIKRANTKUMAR, AGBS, HYD
) To By
identify
strengths and weaknesses of the company
Types of Sales Quota

Types of Sales Quotas
A sales organization can set many types of quotas. The most common
quotas are shown in the following diagram:
Types of Sales Quotas
Sales Volume
Quotas
Profit
Quotas
Expense
Quotas
Activity
Quotas
Quota
Combinations
Cont.
Sales Volume
Quota
Sales Volume Quotas
Sales volume quotas include sales in rupees or product unit

objectives for a
specific period of time.
Sales volume quotas are first set for the entire year. The yearly
total volume
quota is then set for shorter time periods, such as three
months, six months
and nine months. The sales force is assigned
their yearly quotas. Sales targets are set for the year for sales force
so their aim is to sell throughout
the year to achieve the total sales
objective. The sales volume quotas can be set in the following areas:
Sales
Valume
Quotas
Product line
Product range
Sales division
Sales territories
Sales districts
Branch offices
Sales force (Individual)
Cont.
Sales Volume Quota

Rupees / dollars sales volume quotas are
appropriate when salespeople are required

to sell many products
Unit sales volume quotas are suitable when

) Salespeople are selling a few products
) Prices of the product fluctuate rapidly
) Price of each product / service is high
Point
sales volume quotas are appropriate

when the company wants salespeople to sell
products that contribute more to profits
Financial
Quotas
Financial quotas control (a) gross margin or net profits,
and (b) expenses of marketing units

Gross-margin / Net-profit quotas
) Calculate gross margin by subtracting cost of goods
sold (i.e. cost of manufacturing) from sales volume.
Sales managers are not responsible for cost of
manufacturing
) Net profit quotas are generally accepted by sales
mangers as it is calculated by subtracting direct
selling expenses from the gross margin
Expense quotas
) In many companies, expense quotas are stated as a
percentage of sales
) Expense quotas to be administered with flexibility, to
make
salespeople cost conscious, allowing reasonable
Activity Quota
Activity Quotas
These quotas set objectives for job-related duties useful for attaining
salespeoples performance targets. Activity quotas are required to make
the sales force perform other activities which have long-term
implications on the goodwill of the firm. A sales organisation must set a
target level of performance for salespersons. Some common types of
activity quotas prevalent in Indian companies are as follows
Number of sales presentations made
Number of service calls made
Number of dealers visited
Number of calls made for recovery
Number of new accounts opened
Common
Types of
Activity
Quotas
Activity quotas typically should not be a basis for rewards. Rather, their
attachment helps the manager better understand why salespeople do or
do not meet their sales volume quota.
Quota Combinations
Many companies use a combination of these quotas. The two most
commonly combined are sales volume and activity quotas. These quotas
influence selling and non-selling activities.
Methods for Setting

Sales Quotas
) Several methods are used for establishing
sales quotas
) In practice, companies use more than one of
the following methods to increase their
confidence in sales quotas
Territory potential
Past sales experience
Executive judgement
Salespeoples estimates
Compensation plan
We shall briefly discuss each of the above

methods
Territory Potential
Method
1)
2)
3)
4)
The procedure followed by new companies is as

under:
Estimate next years industry sales forecast or
market potential, using sales forecasting
methods
Estimate multiple factor index (MFI) for each
territory, based on factors that influence sales of
the product. These factors are given weights
corresponding
to
the
degree
of
sales
opportunity.
Industry sales forecast in a territory (or territory
market potential=(1)x(2)
By P VIKRANTKUMAR,
AGBS,
HYD
Territory
sales
quota
= (3) x estimated market
Example
If the total sales estimated by a firm for a
certain territory is Rs 20 million during a

period of 12 months and 5 salesperson are
appointed to do the sales activities , the
sales quota for each would be of the 4
million per annum
Past Sales Experience

Method
The process consists of taking past one years
sales (or an average of previous 3 to 5 years

sales), adding an arbitrary percentage (or a
percentage by which the market is expected
to grow), and thus setting each territory sales
quota
The assumption that future sales are related
to past sales may not be always correct
Past sales should be one of the factors used
for deciding sales quotas
Executive Judgement Method

) Senior executives use their judgement when
the product, territories, and the company

are new or very little market information is
available
) Executives predict company sales budgets
and also territory sales quotas
) This method should generally be used along
with other methods
Salespeoples Estimate Method

) Some firms ask their salespeople to set their
own quotas
) Many salespersons either set very high or
too low sales quotas
Administering the Quota

System
1. Setting a good /realistic Quotas
Characteristics of a Good Quota
Attainable
II. Easy to understand
III. Fair
IV. Complete
V.
Timely
VI. Accurate
I.
2. Understand all the problems associated with the
Quotas
3. Securing & maintaining Sales Personnels Acceptance
of Quotas
I.
II.
III.
Participation by Sales personnel in setting quotas

Keeping Sales personnel informed
Need for continuous managerial control
Sales Audit
Sales Audit is a systematic,
critical & unbiased review and

appraisal of the basic
objectives and policies of the
selling function and of the
organization, policies,
methods, principles and
personnel employed to
implement those policies and
achieve
those
objectives
Sales Audit Areas of

Coverage
1. Objectives
2. Policies
3. Organization
4. Methods
5. Personnel
6. Technology
7. Sales Channels
8. Client Satisfaction
9. Sales Compensation plans
10. Customer satisfaction
SALES ANALYSIS
Sales analysis is the detailed
examination of a companys sales data

and involves assimilating, classifying,
comparing, and drawing conclusions.
Coverage of Sales
Analysis
Sales Volume Analysis
Cost Analysis
Profitability Analysis
Productivity Analysis
Sales Volume Analysis

A study of the net sales section of the profit and
loss statement.
Examine sales by product lines, territories, key
accounts, and general classes of customers.
Two approaches:
1. Hierarchical Sales Analysis
2. Effectiveness Analysis
Hierarchical Sales Analysis

A multistage analysis which proceeds from
one sales organization level to the next by

identifying major deviations
investigating these in more detail at the next
lower level.
Example of
Hierarchical Sales Analysis
M a in O ffic e
R e g io n 1
$ 4 0 ,0 0 0 ,0 0 0
R e g io n 2
$ 4 5 ,0 0 0 ,0 0 0
D is tr ic t 1
$ 7 ,0 0 0 ,0 0 0
R e g io n 3
$ 3 5 ,0 0 0 ,0 0 0
D is tr ic t 2
$ 8 ,0 0 0 ,0 0 0
T e r r ito r y 1
$ 7 0 0 ,0 0 0
D is tr ic t 3
$ 7 ,5 0 0 ,0 0 0
D is tr ic t 4
$ 4 ,0 0 0 ,0 0 0
T e r r ito r y 2
$ 8 0 0 ,0 0 0
T e r r ito r y 3
$ 7 5 0 ,0 0 0
T e r r ito r y 4
$ 8 5 0 ,0 0 0
T e r r ito r y 5
$ 2 0 0 ,0 0 0
A d d it io n a l A n a ly s i s
By P VIKRANTKUMAR, AGBS,
HYD
Effectiveness Index
Examine territory performance relative to
potential
Steps In An Effectiveness Analysis

1. Select a market index that indicates what percentage
of total sales should be obtained from each sales

territory.
2. Determine the companys actual total sales in dollars
or units during the period being studied.
3. Multiply the territorial index by the total sales figure
to determine the goal in each district.
4. Compare actual regional sales with the regional
goals to see how much variation has occurred.
Hierarchical And Effectiveness

Analysis
Territories
Different products
Sales by accounts
Channels of distribution
Marketing Cost Analysis

A study of marketing expenses to determine
profitability of marketing segments in the firm.

Two Approaches
Variance Analysis
Percentage of Sales
Variance Analysis
Variance represents the difference between
actual costs and budgeted costs.

High variances should be examined further.
Profitability Analysis
Return on Assets Managed (ROAM)
Measures how productively the assets in
each segment of the business have been

employed.
ROAM= Profit contribution/Assets Managed
Productivity Analysis
Additional productivity analysis may be
required to get a fuller picture of

organizational effectiveness.
Measured in terms of inputs and outputs.
Percentage Of Sales
Examines costs as a percentage of sales.
Analysis is necessary to uncover the

reason for poor performance
1. Was the quota set too high?
2. Are salespeople having trouble with a
particular product line?
3. Can the problem be narrowed down to a
particular salesperson, sales district,
product, or price line?
4. Do any sales divisions or districts have
poor management?
Use of Sales Analysis

Planning sales force activities.
Evaluation of salespeoples performance.
Measuring the effect of advertising and other
sales promotional activities.
Evaluating channels of distribution.
Modifying channels of distribution
Adjust territorial boundaries
Adjust product line
Change classes of customers

Sales Budget (SDM III)

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SALES & DISTRIBUTION

By P VIKRANTKUMAR, AGBS, HYD

and selling prices to determine the amount

What factors do companies take into

account when they decide how many units

By P VIKRANTKUMAR, AGBS, HYD

Meaning And Importance Of

resources should best be allocated to achieve the

Purpose Of The Sales

By P VIKRANTKUMAR, AGBS, HYD

Benefits of Preparing the

forecast unit sales and average prices.

Selling expenses budget approved amount that

the department will spend to obtain the revenues

Profit budget merged sales budget and the selling

By P VIKRANTKUMAR, AGBS, HYD

The Promotion Budget Is Set to Stay

Methods for Setting Sales

By P VIKRANTKUMAR, AGBS, HYD

1. The Affordable Method

selling after accounting for the cost of good

Companies using this approach dont value

advertising as a strategic imperative.

Logic: we cant be hurt with this method.

By P VIKRANTKUMAR, AGBS, HYD

common budgeting method.

factors can be used to adjust the selling

has little to do with reaching the Sales

given percentage. Budgeting is based on anticipated rather then

previous year or the average of several years to compute a percentage.

benchmarks and relates the amount invested in

Sales budgeting method based on the competitive

practices in an industry. They refer to either a

Logic: share of media voice share of consumer

mind share of market.

Companies differ greatly.

competitive parity really suits the

By P VIKRANTKUMAR, AGBS, HYD

financial management concept to chose between

allocation is based on the objective of

By P VIKRANTKUMAR, AGBS, HYD

magnitude of past differences between budgeted and actual

2. Identification of Problems and Opportunities the

Forecast manager is equipped

4. Formulation of Sales Objectives once the forecast has

WHAT IS A SALES TERRITORY?

By P VIKRANTKUMAR, AGBS, HYD

Major Reasons / Benefits of Sales

Improve customer relationships

By P VIKRANTKUMAR, AGBS, HYD

Procedure for Designing Sales

prospective customers within control

Select Basic Control Units

Objective is to equalise the workload of

Objective is to equalise sales potential of

(1) Product knowledge, (2) market knowledge,

(B) Salespersons Effectiveness in a Territory

physical characteristics of the salesperson

the assigned sales territory

By P VIKRANTKUMAR, AGBS, HYD

for making customer calls in a territory

driver-cum-salesperson job, but creative

Procedure for Setting up a

Straight line / Hopscotch