BUDGETING AND EVALUATION

BUDGETING AND EVALUATION

The purpose of Planning is to allocate company resources in such a manner as to achieve these anticipated sales.

BUDGETING

Def:    This is an estimation of the revenue and expenses over a specified future period of time.

This is establishing a planned level of expenditures, usually at a fairly detailed level. A company may plan and maintain a budget on either an accrual or a cash basis.

Purpose of budgeting

  • It forces managers to do better forecasting – managers should be constantly scanning the business environment to spot changes that will impact the business
  • Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance
  • Budgeting can assist in the communication between different levels of management
  • Budgeting is essential in writing a business plan
  • Budgeting ensures that organizations expenditures does not exceed planned income
  • Budgets states the limits of spending therefore act as a means of control

Types of budgeting

  1. Zero based budgeting- In a dynamic business it often makes sense to ‘start afresh’ when developing a budget rather than basing ideas too much on past performance. This is appropriate because the organization is continually seeking to innovate. Each budget is therefore constructed without much reference to previous budgets. In this way, change is built into budget thinking.
  2. Strategic budgeting – This involves identifying new emerging opportunities, and then building plans to take full advantage of them. This is closely related to zero based budgeting and helps to concentrate on gaining competitive advantage.
  3. Rolling budgets – Rolling budgets involve evaluating the previous twelve months’ performance on an ongoing basis, and forecasting the next three months’ performance. US companies typically report to shareholders every three months, compared with six months in the United Kingdom. Given the speed of change and general uncertainty in the external environment, shareholders seek quick results.
  4. Activity based budgeting – This examines individual activities and assesses the strength of their contribution to company success. They can then be ranked and prioritized, and be assigned appropriate budgets.

Budget Determination

  • Departmental budgets are not prepared by cost accountants, in conjunction with general management; apportion overall budgets for individual departments. It is the departmental manager who determines how the overall departmental budget will be utilized in achieving the planned-for sales (and production).
  • For instance, a marketing manager might decide that more needs to be apportioned to advertising and less to the effort of selling in order to achieve the forecasted sales.
  • The manager therefore apportions the budget accordingly and may concentrate upon image rather than product promotion; it is a matter of deciding beforehand where the priority lies when planning for marketing.
  • Thus, the overall sales forecast is the basis for company plans, and the sales department budget.

Sales department budget vs. Sales budget

The sales department budget is merely the budget for running the marketing function for the budget period ahead. Cost accountants split this sales department budget into three cost elements:

The selling expense budget that includes those costs directly attributable to the selling process, e.g. sales personnel salaries and commission, sales expenses and training.

The advertising budget includes those expenses directly attributable to above-the line promotion (e.g. television advertising), and below-the-line promotion (e.g. a coupon redemption scheme).

Methods of establishing the level of such a budget are as follows:

  1. A percentage of last year’s sales
  2. Parity with competitors, whereby smaller manufacturers take their cue from a larger manufacturer and adjust their advertising budget in line with the market leader
  3. The affordable method, where expenditure is allocated to advertising after other cost centres have received their budgets. In other words, if there is anything left over it goes to advertising.
  4. The objective and task method calls for ascertainment of the advertising expenditure needed to reach marketing objectives that have been laid down in the marketing plan.
  5. The return on investment method assumes that advertising is a tangible item that extends beyond the budget period. It looks at advertising expenditures as longer term investments and attempts to ascertain the return on such expenditures.
  6. The incremental method is similar to the previous method; it assumes that the last unit of money spent on advertising should bring in an equal unit of revenue.
  1. The administrative budget represents the expenditure to be incurred in running the sales office. Such expenses cover the costs of marketing research, sales administration and support staff.

 

Sales Budget

  • This can be described as the total revenue expected from all products that are sold.
  • Note that sales budget comes directly after the sales forecast.
  • Sales budget is the starting point of the company budgeting procedure because all other company activities are dependent upon sales and total revenue anticipated from the various products that the company sells.
  • This budget affects other functional areas of the business, namely finance and production, because these two functions are directly dependent upon sales.

Sales budgeting procedure

This figure represents the way that cost accountants view the budgeting procedure

From the sales budget comes the sales department budget. The production budget covers all the costs involved in actually producing the products. The administrative budget covers all other costs such as personnel, finance, etc., and costs not directly attributable to production and selling.

The sales budget is thus the revenue earner for the company and other budgets represent expenditures incurred in achieving the sales. Cost accountants also have cash budgets and profit budgets, each with revenue provided from company sales. It is not proposed to go into why they split into cash and profit budgets.

Budget Allocation to sales force

  • The figure that reaches the individual salesperson is sometimes called the sales quota or sales target and this is the amount that must be sold in order to achieve the forecasted sales.
  • Sales quotas or targets are therefore performance targets that must be reached, and quite often incentives are linked to salespeople reaching such quotas or targets.
  • Each salesperson knows the individual amount they must sell to achieve their quota, and are effectively performance targets.
  • Quotas need not necessarily be individually based, but can be group based, collectively throughout a region – with everybody from the regional or area manager downwards equally sharing the sales commission.
  • Quotas may be for much shorter periods than the one year. The entire year’s budget may be broken down in the same manner, say, month by month.
  • For established firms the most common practice of budget allocation is simply to increase (or decrease) last year’s individual budgets or quotas by an appropriate percentage, depending on the change in the overall sales budget.
  • It is sensible to review individual sales quotas to establish if they are reasonable given current market conditions.

Budget Allocation procedure

  1. Determine the sales potential of territories – For consumer products, disposable incomes and number of people in the target market may be used to assess relative potential.
  2. For industrial products, the number and size of potential customers may be used. Another factor to be taken into account is workload.
  3. Two territories of equal potential may justify different quotas if one is compact while the other is more widespread.
  4. By assessing sales potential for territories and allowing for workload, the overall sales budget can be allocated in as fair a manner as possible between salespeople.

Sales force Evaluation

Salesforce evaluation is the comparison of sales force objectives with respective results.

The Purpose of Evaluation

  • To attempt to attain company objectives – By measuring actual performance against objectives, shortfalls can be identified and appropriate action taken to improve performance.
  • Evaluation can help improve an individual’s motivation and skills – Motivation is affected since an evaluation programme will identify what is expected and what is considered good performance.
  • It provides the opportunity for the recognition of above-average standards of work performance, which improves confidence and motivation.
  • Evaluation allows identifying areas of skill weakness and effort to be directed to the improvement of skills in those areas. Thus, evaluation is an important ingredient in an effective training programme.
  • Evaluation provides information that affects key decision areas within the sales management function.

Salesforce Evaluation Process

  1. Setting of salesforce objectives which may be financial, such as sales revenues, profits and expenses; market-orientated, such as market share; or customer-based such as customer satisfaction and service levels
  2. Determine the sales strategy that must show how the objectives are to be achieved
  3. Set the performance standards for the overall company, regions, products, salespeople and accounts.
  4. Measure the results and compare with performance standard
  5. Take action to improve performance

Setting Standards of Performance

  • Evaluation implies the setting of standards of performance along certain lines that are believed to be important for sales success.
  • The control process is based upon the collection of information on performance so that actual results can be compared against those standards.
  • For the sales team as a whole, the sales budget will be the standard against which actual performance will be evaluated.
  • This measure will be used to evaluate sales management as well as individual salespeople. For each salesperson, their sales quota will be a prime standard of sales success.
  • Standards provide a method of fairly assessing and comparing individual salespeople.
  • Simply comparing levels of sales achieved by individual salespeople is unlikely to be fair since territories often have differing levels of sales potential and varying degrees of workload.

 

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