Planning Part II: Now on to the Numbers

Detailed Expense Budget

 Allow me a couple of Bold Statements:

·         Salespeople hate budgets.  I don’t know why this is the case.  But after three decades in the selling business, the evidence continues to pile up.  Whether they fear accountability, find the process tedious, or can’t stand a couple of hours staring at a spreadsheet – it just appears as though most shirk this duty.

·         The Top Brass of most distributors came up through sales.  And, guess what?  They still hate budgeting.  As strange as it may seem, I continually run into distributors without a detailed expense plan for the coming year.  When budgets exist, they commonly are a product of the accounting side of the business, without solid input and support from the other sides of the house.  Ouch…

The best annual distributor plans call for not only a forecast of incoming sales and gross margin (which we’ve covered), but also predict operating expenses in the coming year.  Over the year, a side by side comparison of anticipated gross margin versus anticipated expenses allows the distributor to gauge exactly how the year is progressing. 

The best expense budget covers the following areas:

·         Payroll Expenses - This includes salaries, commissions, bonuses, payroll taxes, insurance and other benefits.

·         Occupancy Expenses - Things like rent, utilities, maintenance, snow removal (for those of you who enjoy Iowa-style winters), lawn service, janitorial service and other areas fall into this category.

·         Sales Expenses – Company vehicles, cell phones, entertainment, demo units, association dues and anything else which falls into the category of selling.

·         Marketing Expenses – Categories here include the calendars, trinkets and other things you give to customers, trade shows, yellow-page advertising, fees associated with your webpage, and any other advertising (such as sky boxes at your local Major League Baseball stadium and memberships in hunt clubs – insert subliminal message here invite Frank next year). 

·         Other Operating Expenses – This category includes major expenses such as insurance (liability and casualty), non-payroll taxes, depreciation and bad debt loss.

·         Other Operating Income – Rebates, backside marketing funds, special programs, SPA’s every industry has their own terminology.  But these things plan a huge role in the profitability of wholesale distributors.  Managing/maximizing the dollars is critical in any budget plan.

Many distributors wrongly take the approach that they cannot impact expenses, so they fail to put adequate projections into their plan.  While some breakdowns like utility expenses seem to be globally driven and outside the ability of a distributor to impact, we can still make some very important assumptions.

New employees impact the expenses but it often takes 45-90 days to find a qualified candidate.  Working backwards, this allows us to determine the best time to begin our hunt for new employees.   Promised raises, whether costing of living or other, must be factored into the next year’s plan. 

 Besides payroll costs, other expenses can be predicted and controlled.  Here are a few points to consider:

·         Selling Expenses- With many companies in the technology sector investing heavily in demo and lab equipment, it is possible to develop a plan for coming improvements.  Further, we believe that many companies fail to rotate demo equipment and find tens of thousands of dollars sinking down the drain as new revision products come to the market.

·         Marketing Expenses – Trade shows, major programs and advertising can be anticipated and a budget created.

·         Other Operating Income – Don’t forget to manage the rebate dollars.  Is this a large number for your organization?  Whose job is it to manage the numbers?  Will anything change for the better?  Is there an opportunity to throw fifty, a hundred or a couple hundred thousand extra bucks onto the pile? 

Once the sales forecast and expense budget are established, a company bottom line goal is established.  We have a prediction of our before tax (and interest) profit for the coming year. 

What to do if the numbers don’t come out?

Many folks ask; what if the sales numbers and planned expenses do not create a reasonable profit goal?  This is a not just a great question, it’s a question that drives another question.  What would have happened if a solid plan had not been developed?

If the first two steps of your plan show an unacceptable profit picture, we must rethink the plan.  Here are a few points to direct your thoughts:

1.      Are both plans as accurate as possible?  Has the sales team gone into the “sandbagger” mode?  Does your expense budget contain a pie-in-the-sky “wish list” of nice to have upgrades?

2.      Do the stockholders of your organization want to invest in the future?  Sometimes it does make sense to spend extra dollars to expand territories, build new infrastructure, or capitalize on some specific market condition.  These must be carefully understood and not used as an excuse for anemic sales growth or poor expense control.

3.      Do you expect mid-year changes which are not part of either plan?  If so, now is the time to reanalyze the numbers by month or quarter. 

4.      Establish some management points with real metrics.  For example:  if sales for the southern territory do not improve (i.e., increase in new customers) by June 30^th, we will make substantial (and measurable) changes in the territory.

Just as the sales forecast plan was the combined work of the entire sales team, the expense plan is not just the responsibility of the controller or CFO.  To be real everyone must input their best estimates and support this portion of the plan.

 

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