SALES TERRITORY...A sales territory helps in better sales planning and effective operational control. The number of salespeople recruited to cover a market has a direct bearing on

03.2 Territory, Quota & Budget (Also Ch 05 DIRECTING THE SALES FORCE)

SALES TERRITORY

A sales territory is defined as a group of present and potential customers assigned to an individual salesperson, agroup of salesperson, a branch, a dealer, a distributor, or a marketing organization at a given period of time.According to Still and Cundiff, a sales territory is a grouping of customers and prospects assigned to an individualsalesperson. Maynard and Davis are of the opinion that a sales territory is the basic unit of sales planning andcontrol. According to B.R. Cranfield, a sales territory is a geographical area containing the present and potentialcustomers who can be effectively and economically served by a single salesperson, branch, dealer, or distributor.

For a firm, a profitable sales territory is one which has a number of potential customers that are willing to buy thecategory of products sold under the firm's brand name. A sales territory is a geographical area that identifies andserves a category and a certain number of customers. A sales territory helps in better sales planning and effectiveoperational control.

The number of salespeople recruited to cover a market has a direct bearing on the sales and profitability of anorganization. An improper design of a sales territory may lead to higher cost of serving the customers and impactnegatively on the sales force. Specifically, this would result in the loss of opportunity for a firm due to betterterritory management by the competitors and a poor level of forecasting per territory. An improper sales territorydesign also results in improper quota allocation leading to the demotivation of the sales force, and an inefficientmarket intelligence system within the organization leading to a poor strategic response to the changing marketsituation.

Advantages Territories are usually defined on the basis of geographical boundaries. Though the geographic market may have aheterogeneous mix of both existing and potential customers, a decision on the basis of geographic coverage hasdistinctive advantages. It ensures better market coverage, effective utilization of the sales force, and efficientdistribution of workload among salespeople. It also offers a convenient way to evaluate the performance ofsalespeople, control over the direct/indirect costs of the sales function, and optimum utilization of sales time bysalespeople. The designing of a sales territory also enhances employees' morale and helps managers to bettercontrol and monitor sales and evaluate programmes.

Companies follow different strategies of market coverage at different stages of the product life cycle and thebusiness. Similarly, a firm having different strategic business units (SBUs) follows different kinds of coveragestrategies for each independent SBU. A territorial design brings more clarity and focus to the sales targets to beachieved and the geographic market to be covered by each salesperson. A territorial design helps in buildingaccountability for each salesperson in the form of identification of prospects, maintenance of call norms, andrealization of a different level of sales at different points of time. By restricting the sales force to specificgeographic areas, a sales manager not only generates more sales from the same market and serves the customersbetter but also ensures that salespeople do not encroach upon each other's territory. Customer service improvesover a period of time as salespeople have to make calls to the same set of customers whom they have served in thepast. Restricting the sales force to specific geographic areas also helps them to understand the customers' currentand latent need requirements and serve them better by fostering a level of loyalty towards the organization'sproducts and services. An effective territorial design helps to integrate the selling efforts with other marketing andpromotional functions in the territory.

Territories are also useful in evaluating the performance of the sales force. Geographically defined salesterritories allow sales and cost data for regions to be collected and analysed, which provides a basis for acomparison of the sales performances of different territories in the organization.

Size of Sales Territories There are various factors that influence the size of a sales territory. These factors include the nature and demandof the product, mode of physical distribution, the selling process, and transport and communication facilities inthe overall market and territory. Other factors that influence the size of the territory are government regulations,density of population and population spread within the territory, and market potential and growth rates. The levelof competition, firms' sales policy, ability of the salesperson, and the overall economic conditions prevailing inthe country are other factors influencing the size of sales territories.

If a product is a consumer durable with a longer shelf life, the company may prefer to have a larger territorycompared to smaller territories for the perishable commodities. Territories can be established on the basis of thenature of the product, namely consumer, industrial, durable, or non-durable. Only when there is a huge demandin the market for the product, the companies decide on designing smaller territories so that the salespeople cancater to the customers and provide adequate service to them within a limited geographic area.

MM403 Chapter 03.2 Territory, Quota & Budget(Also Ch 05 DIRECTING THE SALES FORCE) Page 2 of14

When companies decide to go through intermediaries like wholesalers, who manage distribution to theretailers, they prefer to have a larger territory. On the other hand, in industrial buying, where bulk order bookingis done by a salesperson or in situations where a company also handles the retailers, the size of the territory iskept small. Organizations where a higher allotment is made towards selling expenses go in for larger territoriesas the outlays permit them to cover a wider area through their own sales force.

Similarly, a better, cheaper, efficient, and faster transportation and communication facility makes companies decidewhether or not the territories of the salespeople are large enough to take advantage of these facilities. Territories in ruralmarkets in India are smaller in comparison to the urban markets as transportation and communication is a problem inthese markets. Government restrictions and regulations of taxes and the movements of the goods also influence thedecisions of a firm in regard to the size of the territory.

In a market with a high density of population and market potential, companies decide in favour of smaller territories.In a highly competitive market, where the success of the enterprise largely depends on the close relationship that onefirm has with customers, the size of the territory should be small. If a company has experienced, well trained, and com-petent salespeople, it may go for a larger territorial cover, as compared to the organizations with novice salespeople whoneed to make more calls to realize a sale.

If a firm with a limited number of products wants to earn higher profits, the size of the territory will be larger, as hereprofit goals decide the size of the territory and the sales are derived out of fewer products. The overall condition of theeconomy also affects the size of the territory. For example, a small size territory is suitable for a firm during recessionwhen prices have stabilized and customers are not willing to spend spontaneously. During a boom condition, however,firms can increase the size of the territory so that salespeople can cover a larger market with a higher demand due to anupturn in the economy.

Designing a Sales Territory

Designing a sales territory is one of the most difficult jobs for sales managers. Various factors like the size of anorganization, level of competition in each product category, number and quality level of the products in theportfolio, type and quality of the services and customer support to be provided, and the quality of the salespersonserving in the organization are considered while designing sales territories. The territories once established need tobe observed and controlled for performance and over a period of time need to be realigned and redesigned forimproving the sales efficiency of the organization in response to changes in the market situation.

Territorial redesign is done when the market grows to such a size that it is not possible for the same sales force tocater to the market or when there is a merger or a takeover. Territorial redesign is also needed when there is achange in the stage of the product life cycle and when there is a reallocation of customers in the market. In thesesituations, a sales manager has to return to the basics of the design and make suitable adjustments to the size of theterritory. Territory design is a time-consuming and manual process where charts, maps, and topographical data aretaken into account.

One of the important factors in territory designing is that the boundaries of the territories are never keptconstant and evolve over a period of time, depending on the nature and number of customers in these areas. Insituations demanding a high level of customer attention and deeper service levels, many firms often allowsalespeople in adjacent territories to operate either additionally or jointly with the existing salespeople in thatterritory. Unless these situations are well planned, it may lead to confusion and demotivation among the sales staffof an organization.

Select the basic geographic control units

Decide on the criteria for allocation

Decide on the starting point

Combine control units adjacent to staring point

Compare territories on allocation criteria and conduct workload analysis

Assign sales force to new territories

Factors influencing the modifications of a territory

MergersMarket consolidationSplit in divisionSales force turnoverCustomer relocationsProduct life cycle changeProduct line change

Modify territorial

boundaries to balance

workload and potential


Select the basic geographic control unitsThe first step in designing a sales territory is to select the appropriate geographic control units that can be

combined to form sales territories. These control units must be small enough to allow flexibility in setting upgeographic boundaries. The units so selected should be homogenous and of reasonable size to achieve economiesof scale. These basic units can be a country, state, district, division, or block with clear boundaries. Firms havinginternational or global operations treat a country as a territory. Further, a country can be subdivided into states orgeographical control units, which differ in terms of area, population, transportation, resources, purchasing power,and the level of development.

Criteria Once the selection of the basic geographical control unit is complete, the next task is to analyse the consumercharacteristics, buying patterns, market share data, and the competitive position of a firm in order to identify thesales potential of each control unit. A sales manager has to identity both the present and the prospective customerson the basis of information such as gender, age group, likes and dislikes, requirements, standard of living, and dataon disposable income. Other market information like the type and level of competition, and demand patterns forthe product category and the brand are also gathered to forecast the potential sales in basic geographical controlunits. Services of field salespeople can be obtained to gather requisite customer information and to forecast thepotential sales with the help of top authorities, market experts, and statistical models. Based on the forecastedsales units for the geographic control units, managers can combine contiguous control units to form territories.The basic objective at this stage is to make the tentative territories as equal as possible in market potential. Eachterritory should provide an equal standard of living for the sales force.

Starting Point After ascertaining the sale potential in control units, a sales manager should form tentative sales territories as thestarting point by selecting geographic locations. A common choice is the location point (often the residence of thesalesperson). This is done to avoid the relocation cost of the salesperson and provides emotional support bykeeping the salesperson closer at home with his family and relatives. Another starting point is the trading area. Atrading area in the Indian context is either a large city or a district headquarter, which provides an immediateaccess to a large market and involves less travel. In national accounts or business-to-business selling, the locationof a large account will be the starting point so that the salesperson can provide services to customers and getinformation on them without much travel. Many times, a central geographic location or a state capital becomes astarting point on the assumption that a place for the sales staff can be identified by the company for relocating thesalesperson to a central place.

Territory Shapes Companies use different kinds of shapes for designing sales territories. The shape of the territory affects the salesexpenses and the ease of sales coverage. It helps a salesperson to spend less time on travel and keeps himmotivated to work hard. Three popular territory shapes used in the Indian market are wedge, circle & cloverleaf.The wedge-shaped territory is most applicable for fast moving consumer goods and is used by companies likeProcter and Gamble Limited, and Hindustan Lever Limited, serving both the urban and the rural markets in India.The design radiates from a densely populated urban area to small rural areas. The travel time among adjoiningwedges can be equalized by balancing the travel time between the urban and rural areas. The circle-shapedterritory is appropriate when companies have their accounts distributed across equally sized areas. A salespersonis based in the central part of the area and travels uniformly to different areas. Companies concentrating in urbanareas like Maruti Udyog Limited and Park Avenue follow this kind of territorial design. The cloverleaf design isused when accounts are distributed randomly throughout the territory. Careful call-planning makes each visit tothe clover a timely affair on the basis of a weekly, daily or a periodic schedule for salespeople.

Control Units Adjacent to the Starting Point Once the decision about the starting point is taken, the sales managers then combine control units to build up themarket. Here, the sales managers keep on running totals on the allocation criteria for each newly designedterritory. This process of allocation continues until all control units are assigned to each salesperson. The basicunits are combined together so that the sales potential can be converted into sales. At this level, sales territoriesare tentative and necessary adjustments can be made in the future on the basis of the scope of market coverage.

Allocation Criteria and Workload Analysis After initial allocation of the control units to the points decided earlier, a sales manager needs to compare theterritories on other relevant criteria like customers per square mile and support retail outlets per square mile.Many times, small and large territories in a particular geographic spread may have an equal potential on customersize. In such cases there is a need to allocate control units on the basis of travelling and call norms in order toreach customers. The more the number of factors considered for deciding on the territory, the more judgementalis the sales manager on deciding on the territories. In this process, sales territories are given the final shape byadjusting and redistributing the tentative territories. This adjustment is made keeping in view the sales potential,customer size, market growth rate, and sales expenses involved in the market coverage.


Once initial boundaries are established for each sales territory, the next task is to determine how much work isrequired to cover each territory on the basis of equal sales potential & workload. Workload analysis consists ofdeciding how much of selling effort is required to meet the sales objectives for a given region. If there is a needfor a higher selling effort within the territories, then the boundaries can be shrunk to match the suitability ofmarket coverage. If the territory is found to be having customers more than what a single salesperson can cover,then the task is shared by adding more salespeople. Many different potential territories can be constructed &modified when the workload approach is considered.

The starting point of the workload approach is the finalization of the tentative boundary for each sales territory.A decision then has to be made on how much work is required to cover each sales territory.

The sales potential derived from account analysis is then used to decide on how much each account must becalled on and for what duration of time. The total effort required to cover a territory can be determined byconsidering the number of accounts and calls to be made for each account, the duration of each call, estimatedtime of travel, and non-selling activities. This method is popularly known as the Talley's workload approach. Here,all accounts may not be taken up for calculation. In typical business-to-business situation, while large accounts areconsidered, smaller accounts are proportioned depending upon the potential of large businesses. The optimum callfrequency is decided at sales conferences. This way it is easier to find out the workload in each territory. Firmscan be grouped into volume classes and the call frequency for each volume class can then be agreed upon.Territories with a different combination of volume customers can be identified to calculate the workload perterritory.

New Territories After determining the final form of sales territories and making necessary adjustment in tentative sales territories,the last step is to assign the territories to the individual sales force. Suitable salespeople are appointed for eachterritory and the exact responsibilities are assigned to these people. This is done keeping in view thecharacteristics of each territory, needs of the territory, and the appointment of intermediaries. The sales procedurestarts from each territory with the help of salespeople and middlemen. Many firms appoint new salespersons inareas closer to their place of stay, whereas more experienced salespeople are assigned remote territories with ahigher potential for growth and sales realization.

SALES QUOTA

Sales quotas are the targets that salespeople try to achieve within a specific period of time, which contributestowards achieving the organizational goals regarding sales forecasts. It is an expected performance objective.Quotas are routinely assigned to the sales units, such as departments, divisions, and individuals, and they proceedto reach at these quotas in their respective domain. They are sales assignments or goals, which are to be achievedin a specific period of time. According to Philip Kotler, 'A sales quota is the sales goal set for a product line,company division, or sales representative. It is primarily a managerial device for defining and stimulating saleseffort.' They are sales assignments, or goals and expectation of the top management expressed in volume or inrupee sales for a specific future period. It is a part of the company's total expected market share that is assigned tothe salespeople in each territory, a branch, a distributor, a selling agent, a dealer, or any other selling unit as atarget to be achieved in a specific future period of time.

It is a quantitative goal assigned to a specific marketing unit such as a salesperson or a territory for a timeperiod. So, sales quota is a standardized method of evaluating the effectiveness and performance of salespeople.Quotas are based on sales but there is a difference between sales potential and quota. A sales forecast is anestimate of what a firm expects to sell during a time period using a particular marketing plan. Sales quotas maybe set equal to, above, or below the sales forecast. Sales potential is the maximum share of the market demandthat a firm can obtain under the legal environment. Sales potentials help the firms for long-term and strategicplanning, but sales quotas are used for different reasons.

Importance of Sales Quota There are essentially three reasons for the use of sales quota. The sales managers use the sales quota formotivating salespeople. People with a mind to achieve higher things like the concept of sales quota due to itsobjectivity in measurement and subsequent linking with the reward system. They also get a feedback on theirperformance through the achievement of quota in the organization.

Quotas always lead organizations towards management by exception. This means that the management focusesattention on the people who are highly performance oriented, and takes care of their interests in theorganizational policies. Similarly, managers can devote more time to people who are poor performers, andattention can be given to their knowledge and skill building to improve their efficiency. The management canalso spend more time on high-performance individuals to learn the basic elements for which they outperformothers and try to bring the same elements within others for improving their sales performance.


Sales quota also helps in giving directions to the salespeople's efforts and resources for specific ends andtargets the organization sets as important. It is seen in organizations that attainment of sales quotas is tied to theincentives and financial rewards of the organization. Quotas help in providing a means for measuringperformance through the measure of individual activity in the organization. Management compares theachievement of individuals with their targets and thus quotas become the primary basis for evaluatingperformance.

Quotas serve as guidelines and direct the behaviour of salespeople because it also assigns authority as a formalright to exercise control. It gives the power to augment accountability and punish for non-compliance. This kind ofcontrol also serves as a self-supervisory mechanism in the organization where the salesperson can always measurehis performance with the quota as they are set on sales volume, individual product line's sales volume, number ofnew accounts and also expenses.

Principles of Quota Setting Setting of sales quota is a challenge to the sales manager, which should be handled with precision and adequate

skill. There is no specific method or formulae for setting quota; however, a scientific principle can be followed foreffective quota setting. There should be objectivity in approach while fixing quotas and it should be based on factsand figures drawn from the market. A complex quota setting procedure does not bring clarity to the sales manageras well as the sales staff. The simplest method of quota setting should be followed so that the salespeople as wellas the manager will understand it easily. There should be an equal level playing field while setting quota and theallotment should be uniform between the salespeople by taking into account the conditions prevailing in theterritory, the level of competition, and the experience and ability of the salesperson in achieving the sales goal.The set quota should be achievable by an average salesperson with optimum effort.

There should be a level of definiteness in the quota set for a salesperson. It should be fixed either in terms ofgeographic territory, or on money value, or on the basis of units of product(s). The salesperson should knowdefinitely what amount of sales has to be achieved in what period.

A participatory quota setting procedure followed jointly by the sales manager and salespeople together servesas a tool of motivation and realization of the organizational sales goals. Achievement of quotas should be linkedwith additional incentives so that salespeople stay committed to the work process for a longer period of time. Theinformation used for setting quota should be based on facts and should be accurate and representative of theprevailing conditions of the territory. It is essential for the sales manager to follow-up the quota achievementprocedure and also evaluate the level of sales quota. It can be achieved by comparison between the sales quotaand performance regularly. Evaluation of sales performance with quota helps in designing the compensation plan,motivational plan, and promotion of the field staff.

The Concept of SMART

A concept called SMART is used in the sales literature for developing an efficient quota setting mechanism. Inorder to make the quota acceptable to the sales staff and to obtain optimum result, a quota should be specific,measurable, attainable, realistic, and time specific. Specific quotas are clear and concise, as they don't leave anydoubt in any body's mind as to what is to expect. Measurement of customer relationship by a salesperson is adifficult proposition. Hence, it can be measured in terms of volume of sales generated in quantity or in rupeeterms.

Attainable goals are realistic goals based on market facts and are also challenging, as they demand optimumeffort by the average salesperson. The acceptance of a difficult or unattainable quota is unlikely in many salesorganizations. Quotas should be time specific as they are developed for short-term periods as targets and long-term periods as market goals. While the life of salespeople revolves around the monthly records and quarterlyreports, their growth in career largely depends on the annual performance quota. This helps the sales manager tomake his salespeople feel what is expected of them and what incentives they will get by the achievement of thesale quota.

Selling By Objectives Sales managers chart out the selling strategy for their respective units from the original corporate sales plan. Thesales units are decided depending on the hierarchy of the sales manager. It can be a state sales unit or a district,zone, or area unit. The sales manager takes two distinctive steps in dividing the sales strategy to the unit level andfixing targets for each person. According to Charles Futrell, selling by objective (SBO) involves two basic steps,viz., organization of the sales job and defining annual objectives in important areas.

Level Level OneLevel TwoLevel Three

Questions that need to be answered while Setting Quota Does the quota state accurately what the intended results are? Does the quota specify when the intended result is to be accomplished? Can the sales manager measure the intended result?

MM403 Chapter 03.2 Territory, Quota & Budget(Also Ch 05 DIRECTING THE SALES FORCE) Page 6 of14ORGANIZATION OF THE SALES JOB While organizing the sales job, there are four key areas in which responsibility can be defined for every person onthe payroll of the company. These include territory management, account management, call management, and self-management.

Sales managers treat the territory as a business unit and discuss the business process to be followed for the yearin managing the territory. It involves the management of the revenues, expenses, key accounts, development ofleads and prospects, market share and growth potential, and trade and dealer relations within their respectiveterritory.

Account management involves the management of each customer depending on his/her size and revenuepotential. Managers calculate the potential sales from each account, the procedure for generation of records fortrends about clients in the area, and procedures for coverage of all the accounts. Attempts are made to classify theclients as per the Boston Consulting Group (BCG) matrix for tactically managing the accounts and efforts of indi -vidual salespersons in achieving sales. Stars are the accounts which need more attention as they have a high futuregrowth potential. Cash cows are those accounts that give higher sales to the firm and the salesperson would like tomaintain the current business deal and build a long-term relationship with these customers. Problem child is thecustomer who has a high potential but does not give adequate return at the current period of time, which calls fornew selling strategy and problem-solving approaches for the salesperson. Dogs are the accounts that need to bedivested because they have low sales potential & declining sales, and do not show any promise of improvement.

Call management is the next important task for a sales manager. Though there are salespeople on the field tomake sales calls, the sales manager decides the call norms. The call norms are decided taking into account thenature of the account as explained above. The sales manager should have first-hand knowledge about the contentof the call. He has to identify answers to the questions like:

Is the salesperson applying adequate selling techniques during the customer contact and presentation? Is the salesperson making repetitive mistakes in handling presentations and managing customer objections? Is the salesperson knowledgeable enough to respond to customers regarding company, products, competitors,

leads, and materials required before making a sales call? Has the salesperson planned about the likely customer objections and developed adequate responses for the

same before the sales call? Is the salesperson trained enough to communicate adequately with customers, meeting sales resistance,

understanding customer behaviour, improving call impact, gaining greater customer penetration, andfollowing' through the customers adequately?

Is the salesperson knowledgeable enough to explain the complexity of the product, its applications, serviceand system back up, and technical knowledge to handle the product malfunctioning?

Self-management is a critical issue gaining attention in modern selling. Though the salesperson is at the bottomof the sales organization, he is the lifeblood of the organization and his achievement decides the fate of theorganization. These self-management issues involve dress, style, demeanour, and personal decorum of thesalesperson. Communication skills, memory, logical speaking, and writing competency are also issues to behandled under self-management. The knowledge of selling techniques and selling strategies can also be shapedand modified by training under self-management systems in enterprises.

DEFINING ANNUAL OBJECTIVES There are three kinds of objectives for the future period that can be set by a sales manager for every salesperson

in the organization. These objectives are regular and recurring objectives, problem-solving objectives, andcreative objectives. The regular objectives are related to the sales volume, targeted market share, expenses,frequency and quantity of calls, prospects and lead generation, growth in order size, market coverage, andreporting procedures. These goals ensure that the basic needs of the organization are fulfilled throughresponsibility centers in the organization.

Problem-solving goals are individual salesperson's goals that involve deviations from the standard and routineobjectives, where things have gone wrong and results are not as per the desired outcome set before, where threatsand changes are bringing a blockage to the smooth functioning of the organization systems. These objectives needspecific, measurable, and unique commitments from the salesperson. Achievement of these objectives bringsexcellent performance evaluation.

Creative objectives are actions the salesperson commits which are new, challenging, creative, innovative,intelligent, and original in the territory or in another area of responsibility. These goals mean managingbreakthroughs and quantum leaps to new levels of performance. These goals enable the salesperson to go beyondthe ordinary and achieve the exception. Completion of such objectives results in superior performance evaluation.

Procedure for Setting Quota A procedure for setting quotas is a process built on one-to-one discussion between the sales managers with eachsalesperson serving a territory. This procedure is the most democratic way of handling the targets and motivatingsubordinates to achieve the organizational goal. There are essentially three steps to be followed for quota setting. Theyare schedule planning, conferencing with each salesperson, and arriving at a summarized written quota statement.

MM403 Chapter 03.2 Territory, Quota & Budget(Also Ch 05 DIRECTING THE SALES FORCE) Page 7 of14A schedule planning involves planning for goal setting meetings with individual salespeople and particularly with newrecruits. These schedules are necessary to explain systems and reasons, benefits and incentives for each salesperson, andgoals for the organization. These are called orientation briefings for the organization because the authority and status ofthe manager lend power and impact to what is briefed to the salespeople. The salespeople should be allowed to askquestions and get clarifications for their doubts, and then the sales manager announces for a one-to-one meeting tofinalize each individual's goals for the set period. The sales manager then asks the salesperson to submit theindividual goal proposal for setting up the guidelines for a combined goal setting meeting. The next step is to arrange conferences with individual salespeople. The salesperson brings the filled in goalsetting form with him for discussion. The sales manager allows the salesperson to discuss all the rows in the firstcolumn in the output table. The discussion revolves around the four key areas - the territory, the account, the callmanagement, and self management- and the manager gets an agreement on these areas. Then the sales managerstarts discussing about the five key areas as mentioned in the above form, viz., volume per month, expenses permonth, gross margin per month, market share per month, and key account coverage per month. All the threeclasses of objectives should be covered. When salespeople get stuck with regular goals, the sales manager helps toraise them if they can be led to seeing problems blocking the growth or can be challenged to innovate and raisetheir levels of order size, account management, market penetration, or self-management. The purpose is to create a win-win situation for both the organization and the employee. If goal setting cannot becompleted in one meeting, the sales manager can set few more meetings for problem solving and creativeobjectives. The meetings have to be formal, structured, and run with scheduled discussion.

The next task is to prepare a written summary of the goals agreed upon. The objective or goal setting form servesas a guide for the mutually agreed goals. The written goals become a document of understanding for all purposes.It provides the sales manager and the salesperson with clear-cut goals and responsibilities for the year ahead.

Types of Sales Quota Companies set different types of sales quotas. The method of selecting the quota depends on the business practice,design of the organization, and level of competition in that industry. Broadly, quota types include sales volumequota, sales budget quota, sales activity quota, and a combination quota.

Sales Volume Quota Most of the companies follow this method of quota setting. It is the most traditional and commonly used methodin Indian organizations because this method provides an important standard for appraising the performance ofindividual salespeople, intermediaries, and branch. Sales volume quotas communicate the organization'sexpectations in terms of what amount of sales for/in what period. For example, Torrent Pharmaceuticals usesrupee sales objectives, whereas a company like General Motors uses the number of cars and commercial vehicles.If a salesperson has to sell 30,000 units of a product from March to August then this can be called as the salesvolume quota for the said six months. This kind of quotas can be set for geographical territories, different productlines, different marketing intermediaries, or for more than one of these in combination with any unit of the salesorganization.

The annual quota is set for the year and then they are broken into specific time periods like quarters, months,and weeks. This is called the break down approach. Once the salesperson knows his annual target, he can plan outhis targets for different periods. The salesperson can fix the sales quota on the basis of the total product line, theexisting product lines, and new product lines, or territories depending on the design of the organization, whichmay include the sales divisions, regions, branches, districts, and individual sales territories. Organizations makesales forecasts on the basis of the above units, which makes it easier for them to establish the sales quota.

The sales volume quota is of three kinds: monetary sales volume quota, unit sales volume quota, and points salesvolume quota. Organizations selling a broad product line set sales volume quota in monetary terms rather than interms of units of product. The international sales quota is also shown in dollars/pounds or relevant foreigncurrency. The monetary quota is set for each sales unit separately. For example, Zuari Furniture follows a quotapolicy where each salesperson handlinga specific territory tries to achieve thesales quota in monetary terms.

The second method is quota setting byvolumes. This method is used in twosituations, viz., when prices of productsare expected to fluctuate considerablyduring the quota period, and whencompanies with a narrow product linesell at a price that fluctuates little duringthe quota period. Volume quota settinghelps the firm to achieve the sales involume terms as the rupee value may vary during the sales period.

Individual Goal Setting FormOutput Name

Year Your Territory Results expected

Pessimistic Realistic Optimistic Results 1

.Volume per month

2.Expenses per month

3.Gross margin per month

4.Market share per month

5.Key account coverage/ month


The third method is setting sales volume quota in terms of 'points'. Some organizations use sales volume quotaexpressed in 'points', into which money or unit sales or both can be converted as desired by the sales manager. Amulti-product firm may fix a point volume quota where sales of one unit will bring a certain point, whereas theother will bring a higher point for the salesperson. If a salesperson is assigned a quota of 1000 points by theorganization, he is expected to get sales orders of 1000 points as a combination of any product mix of the firm.

Sales Budget Quota These kinds of quotas are set for various units by the organization in order to control expenses (expenses quota),gross margins, and net profits (profit quota). The overall intention of setting a budget quota is to make it clear tothe salespeople that they are more of a responsibility centre where the job includes not only obtaining the desiredsales volume but also making good profits. This means the cost to acquire customers should be less than therevenue generated from those new customers.

Expense quota ensures that the salespeople limit their expenses in alignment with the sales volume and controlthe cost to acquire customers. In this method, the sales manager seeks to provide salespersons with financialincentives to control their own expenses. Tying performance with sales expenses and offering expenses controlbonus for incurring lesser expenses in realizing sales are the two common methods by which the expense quotacan be set. A salesperson receives an expense budget as a percentage of the territory sales volume and managesthe expenses in rupee terms. Many companies set limits on items of expenses like lodging, meals, andentertainment, and expect the salespeople to manage within that budget.

Profit quota can be set on gross margin or on net profits. Organizations emphasize net profits more than salesvolume. The salesperson is asked to generate profitable sales rather than mere sales. Organizations set profitquota along with the sales volume quota because profits are necessary for surviving and excelling in business. Therationale behind this type of quota is that sales personnel operate more efficiently to reduce expenses and increasethe sales resulting in increased margins and profits. The salesperson is bound to achieve either the required grossmargin or net profits while achieving sales quota. Gross margin quota is determined by subtracting the cost ofgoods sold from sales volume.

The manufacturing department provides the sales manager with information regarding the cost of goods sold,which includes the cost of manufacturing the product. By subtracting the cost of goods sold and the direct sellingexpenses from the sales volume, one can determine the net profit quota. The same method is explained in the tablebelow: The problem with this method is that the salesperson does not decide the price and has no control over themanufacturing cost; therefore, they cannot be solely made responsible for the gross margin. In net margin quotathe salespeople sometimes cut back costs so much that there is negative impact on sales and the quality suffers.The sales manager needs to constantly monitor the performance and expenses of the salespeople for managingprofitable sales.

Sales Activity Quota The activity of a salesperson has direct influence on the sales of the organization. The salesperson is not alwaysinvolved in sales realization; for example, a retail salesperson has a job of providing information only. In this case,the quota can be fixed on the activity a salesperson has to perform, rather than the final outcome. In addition to thedirect sales activity, the salesperson is expected to do some non-selling activity and the quota can be set as a mixof these activities. Activity quota is mostly seen in insurance selling where salespeople must continuously doprospecting, generate sales lead, and develop new business.

This kind of quota is also common in pharmaceutical selling, where medical representatives spend time forcalling on doctors and hospitals to explain new products and new applications of both old and new products. Salesmanagers also undertake time and motion studies and conduct work-studies for deciding on the optimumcombination of activities for a salesperson.

Activities quota set objectives for job-related duties, which help the salespeople in achieving their performance targets.They help the salespeople to do the non-selling activities perfectly, as they become part of the job definition.

Salespeople seldom find this method acceptable because they consider non-selling activities as of less value. So theyput less time and effort in these activities. Often they provide false activity reports regarding these activities, as they findthem of little significance.

Combination Quota Many organizations use a combination of these quotas. The most common combination is the sales volume and activityquota. Combination quota is used to control sales force performance on the basis of selling and non-selling activities. Acombination sale quota can be achieving a sales target of 1000 units along with developing 20 new key accounts,identifying 100 prospects, and bringing back 50 lost customers. This kind of quota often reduces the expectedunderstanding level of the job for a novice, and often serves as a de-motivator. So, sales managers have to use thismethod with continuous briefing and effective control over the sales force. Combined sales quota should be based on themost important activities like sales volume and the products that sell the most.


Methods of Setting Sales Quota Quotas Based on Sales Forecasts and Potentials Large organizations set quota on the basis of sales forecasts and the sales potential of the market and the territory.Organizations forecast the total sales or volume for the entire market, which is then divided into territories, andthen brought down to the individual salesperson level. The forecasts can be generated at the corporate level, atthe total product line level, and at the individual products level. Each of these forecasts is prepared on a geo-graphic level. Estimated future sales per territory are then divided by the number of sales persons or by thenumber of branches to determine the sales quota for each. For example, if the total sales estimated by a firm for acertain territory is Rs 20 million during a period of 12 months and 5 salespersons are appointed to do the salesactivities, the sales quota for each would be of Rs 4 million per annum.

Quotas Based on Forecast It is not always possible to obtain the forecasted figures for individual sales territories as companies lackinformation, data, money, and people to determine the sales potential for individual sales territories. Smallcompanies set quota in relation to their sales forecast or total market estimate. They establish quota on the basisof the past performance in geographic areas without regard to the sales potential.

Quotas Based on Past Sales or Experience Some companies could not make the sales estimates in advance for the total market. In such cases, companiescollect the sales data of the previous years, average them out for each geographic territory, and then add anarbitrary percentage for next year's quota. A few companies set quota based on average sales of longer periods.This average method is followed due to the ease of using the trends and projecting them for future. Everyone'sgoal in an organization is to surpass the previous year's sales, and this method boosts up the morale of thesalespeople. This method gives a rear view perspective, as it does not take into consideration the sales potential.It also does not ignore the past and present situation of different territories. If several competitors enter a territorythen the sales potential is affected and the trend projections may de-motivate the salespeople.

Quotas Based on Executive Judgement This method is used when there is little or no information available about the market. It may also be impracticalto find out the potential of a new product in an existing territory or an existing product in a new territory. Somanagers have to rely on their past experience for making future predictions. They try to analyse facts andfigures for the different markets and then decide the quota for the territory, salesperson, and intermediaries.

Quotas Based on Salespeople Judgement Many companies ask their own salespeople to set the quota for themselves. This is mostly applicable in situationswhere the company is expanding the territory or starting up its own sales force. In these situations it is difficult toproject sales even though there may be significant sales potential. Most companies allow their salespeople to givedata to set their quota. Many companies also use these inputs from the salespeople to fix their production andmanufacturing schedules.

Since salespeople are very much acquainted with the market conditions in their respective territories, they willbe able to determine the quotas more efficiently and realistically than the supervisors or sales managers. Thisprovides an opportunity for the salesperson to test their abilities and it makes them to work with highermotivation. But many a times the salesperson set the quota lower than his level to have comfort on the job. Thesalespeople may not have complete or sufficient knowledge and information to make necessary analysis for aneffective forecasting.

Quotas Based on Compensation Salespeople are promoted on the basis of their achieving quota. It is like a bottom line for the salespeople.Salespeople are evaluated on the basis of their attaining quota for higher assignments. Salesperson gets extracompensation by reaching sales volume quotas for total unit or rupee sales, sales of existing products and newproducts. Quotas related to the compensation are determined by any of the previously explained quota settingmethods. Meeting quota is a way of life for the salespeople as quota has a direct influence on their commitment tothe organization.


SALES BUDGET

The sales budget is a blueprint for making profitable sales. It details who is going to sell how much of what duringthe operating period, and to which customers or classes of trade. Simply defined, a sales budget consists ofestimates of an operating period's probable rupee and unit sales and the likely selling expenses. These twoestimates are related to predict net profit on selling operations. The sales budget, then, is a projection of what agiven sales program means in terms of sales volume, selling expenses, and net profits. The following figure showshow sales budgets fit into the personal-selling effort.

•

(contributing advice and informed opinions). But in nearly

major portion of these expenses.

Purposes of the Sales BudgetMechanism of ControlControl is the primary orientation in sales budgeting. The completed budget, which is a composite of sales, expense, and profitgoals for various sales units, serves as a yardstick against which progress is measured. Comparison of accom plishments withrelevant breakdowns of the budget measures the quality of performance of individual sales personnel, sales regions, products,marketing channels, and customers. These evaluations identify specific weaknesses in operating plans, enabling salesmanagement to make revisions to improve performance. The sales budget itself, being a master standard against which diverseaspects of performance are measured, serves as an instrument for controlling sales volume, selling expenses, and net profits.

Computerized information processing has enormously increased the effectiveness of control through the sales budget.Management is provided daily with details of actual performance compared with budgeted performance. With current andcomplete information on sales volume and selling expenses, the sales manager spots variations from the budget and takescorrective action before they get farther out of line.

Both the sales volume and selling expenseportions of the sales budget have their roots inthe personal-selling objectives, which triggertwo key decisions on personal-selling strategy:(1) the kind of sales personnel and (2) salesforce size.

The sales forecast is the source for thesales volume portion of the sales budget. Thesales volume objective derived from the salesforecast is broken down into the quantities ofproducts that are to be sold, the sales personnelor sales districts that are to sell them, thecustomers or classes of trade that are to buythem, and the quantities that are to be soldduring different time segments in the operatingperiod. Making these breakdowns requirescomplex sequences of planning decisions. Afterthese breakdowns are made, the sellingexpenses that will be incurred in implementingthis sales program are estimated. The sales budget, then, starts with the salesvolume objective as a point of departure and, aswe have noted, that objective traces to the salesforecast. Consequently, the extent ofinvolvement of the top sales executive in theearly phases of budgeting (for the entirecompany) depends upon the degree to whichthis executive participates in forecasting. Insome companies, top sales executives playleading roles in sales forecasting, while inother companies, they have passive roles.

Personal Selling as Part of the Promotional Program


Instrument of PlanningThe budgeting process requires complex sequences of planning decisions. The sales forecast shows where it is possiblefor the business to go, and during the budgeting process planners determine ways and means for the business to get fromwhere it is to where it wants to go. The sales forecast reveals data on sales potentials, and the budget planners calculatethe expenses of converting forecasted sales into actual sales.

The sales budget planners formulate the sales plan so that both sales volume and net profit objectives are reached.Showing how to achieve the targeted sales volume is not enough. The planners show how the targeted volume can bereached, while keeping selling expenses at a level that permits attainment of the targeted profit. A sale budgeting requiresthe drafting of alternative sales plans and selection of the one most appropriate for serving the company's sales volumeand net profit objectives.

Sales Budget-Form and Content

Estimating Budgeted Selling ExpensesThe sales budget is drafted with a view toward obtaining an optimum net profit for the forecast-sales volume.Note that it is the optimum - not the maximum - net profit that is the short-run profit objective. Profitmaximization is the objective over the long run, but other considerations including the necessity for providing"business building" customer services, and for scheduling calls on prospective new accounts, make profitoptimization the short-run goal. In other words, some selling expenses would not be incurred if management didnot look beyond the current budgetary period. A forward-looking management considers these expenditures asinvestments that return sales and net profit dollars during succeeding budgetary periods. Management reasonsthat certain expenditures made during the period just ahead permit future savings in similar expenditures.

Thus, both immediate and long-run sales plans are taken into account in arriving at estimates for the sellingexpense items included in the sales budget. Indeed, the immediate sales plan is an integral part of the plancovering a longer period. However, sales plans for the period just ahead are drafted in sharper outline than arethose for longer periods, such as those covering five, ten, or twenty-five years. For the immediate budgetingperiod, plans cover the types and amounts of personal-selling efforts required to attain the sales and profitobjectives. If the sales volume goal for the coming budget period calls for an additional Rs.1 million in sales,sales management identifies the activities needed for reaching this goal. In turn, these activities, which may bestated in such terms as the numbers of new dealers needed in various classifications, are translated intoestimates of the expenses incurred in performing them.

Therefore, after sales management expresses its plan for the forthcoming budgetary period in terms ofrequired activities, the next step is to convert these into rupee estimates for the various items of selling expense.If the plan calls for sales personnel to travel a total of 500,000 miles in the year ahead, and the company pays astraight mileage allowance of 18 paise per mile, Rs.90,000 to cover mileage allowances is included in theselling expense section of the sales budget. The paying of 18 paise a mile for sales travel, a-previouslyestablished practice, aids in estimating the costs of reimbursing sales personnel for travel, but managementdetermines the total number of miles sales personnel are to travel. In budgeting items of selling expense, then,management (1) estimates the volume of performance of the activity and (2) multiplies that volume by the costof performing a measurable unit of the activity.

The completed sales budget is a statement of projected salesrevenues and selling expenses. The so-called "summary" of thesales volume section of the sales budget is both in rupees andproduct units, so that budgeted figures are readily adjustable forprice changes. The budget section on planned sales volume ispresented in considerable detail. Not only are total unit salesshown but so are unit sales of each product, unit sales by salesterritory (and/or region), unit sales by quarters or months, and unitsales by class of account (or type of marketing channel). Forinstance, Figure 01 shows unit sales of products A, B, and C bysales regions for 2008. Figure 02 take the breakdown one stepfarther and shows unit sales of the three products in the northeastregion by quarters. Figure 03 carries the breakdown another stepfarther and shows unit sales of the three products in the northeastregion for the first quarter by class of account. Computerizedmarketing information systems, of course, have the capability ofcalling up for display on desk-top consoles these and otherbreakdowns. Not every company uses the same breakdowns, eachselecting those appropriate to its own planning, directing, andcontrolling of sales efforts.

Fig 01

Fig 02

Fig 03

2008

2008

2008


Using standard costs. When the total cost of performing a specific activity is analyzed and the cost of performingone measurable unit of the activity is determined, the first step has been taken toward establishing a standardcost. The second step is to compare the historical cost of performing one unit of the activity with what the costshould be, assuming standard performance, and considering the effect of changed conditions on costs. Astandard cost, in marketing as well as in manufacturing, is a predetermined cost for having a standard employeeperform under standard conditions one measurable unit of the activity.

The techniques for determining standard costs of distribution are less refined than are those for standard costsof production. Some companies have developed standard distribution costs accurate enough to provide a meansfor appraising the relative efficiency of performance of personal-selling activities. The executive compares currentcosts against known yardsticks. Standard costs of distribution simplify the estimating of individual items in theselling expense portion of the budget. Any predicted volume of sales, or any division of sales among the variousproducts, classes of customers, or territories, are convertible into selling expense estimates through the applicationof standard costs.

Other estimating methods. Some companies that do not have usable standard distribution cost systems employ othermethods for estimating selling expenses. Some simply add up selling expenses over a recent period and divide bythe number of units of product sold, thus arriving at an average cost per unit sold. This figure is then multiplied bythe forecast for unit sales volume, to obtain an estimate for the total budgeted selling expenses. Some adjust theaverage cost per unit sold for changes in the strength of competition, general business conditions, the inflationrate, and the like. Other companies calculate for past periods the percentage relationship of total selling expense tosales volume. This percentage, which mayor may not be adjusted for changes in conditions, is applied to the dollarsales forecast to estimate budgeted selling expenses.

Finally, some companies build up their estimates for total selling expenses by applying historical unit costfigures to individual selling expense items. This is not a true standard distribution cost method, but it does focusupon individual expense rather than upon the total. Consequently, the expense estimates in the budget possessgreater accuracy than if total selling expense percentages or total selling expenses per unit of product are used.

Budgetary ProcedureCompany budgetary procedure normally begins in the sales department. The sales department, in nearly allcompanies, is the main department generating inward flows of revenues. The nature and amount of the predictedflows of sales revenues impact directly upon the activities of other departments. Therefore, once top managementreceives and gives tentative approval to the sales budget, other departments prepare budgets outlining their plans.For instance, the production department takes its cue from the sales budget in preparing budgets formanufacturing expense and inventory, as well as in planning production schedules. Similarly, the financialdepartment uses the sales budget is the starting point in preparing budgets for capital expenditures, earnings andcash position, and administrative expenses. It should be noted that the production department is mainly interestedin the budgeted unit sales, whereas the financial department is concerned chiefly with planned rupee sales.

Planning Styles and Budgetary ProceduresThere are two basic planning styles-top-down and bottom-up. In top-down planning, top management sets theobjectives and drafts the plans for all organizational units. Top-down planning goes along with the Theory Xphilosophy of management whose key assumptions are that people dislike work and responsibility and prefer tobe told what to do and when. By contrast, in bottom-up planning, different organizational units (generallydepartments) prepare their own tentative objectives and plans and forward them to top management forconsideration. Bottom-up planning goes along with the Theory Y philosophy of management, whose keyassumptions are that people like work and responsibility and commit themselves more strongly to objectives andplans that they have participated in formulating.

Sales budgetary procedures differ from company to company with most differences tracing to difference inbasic planning styles. If the predominant planning style is top-down, the head of each organizational unit in thesales department (for example, a regional sales manager) receives his or her sales and profit objectives from thenext level above and makes plans to fit those objectives. Adjustments in objectives are made if subordinates raisequestions regarding their fairness or soundness, but the tendency in a top-down organization is for subordinates toaccept the objectives passed down by their superiors.

If the predominant planning style is bottom-up, the heads of even minor organizational units, such as branchsales managers, sometimes even individual sales personnel, assist in determining sales and profit objectives and inmaking plans to accomplish them. Most budgeting experts recommend planning at least partially in the bottom-upstyle, arguing that participation in planning at all levels helps to maximize benefits from sales budgeting.

Democratic administration (management based on Theory Y assumptions) requires the widest participationin planning, and participation, from the organizational standpoint, is as much a vertical as a horizontal concept. Itis as important to have participation from each organizational level, from the lowest to the highest, as it is to havethe overall company budget represent the best thinking from all divisions. The following discussion assumes thatthe head of even the most minor organizational unit not only participates in setting sales and profit objectives, buthas a voice in drafting plans to accomplish these objectives.

MM403 Chapter 03.2 Territory, Quota & Budget(Also Ch 05 DIRECTING THE SALES FORCE) Page 13 of14Actual Budgetary ProcedureThe preparation of the sales budget normally starts at the lowest level in the sales organization and works upward.The lowest level in this budgetary process is a profit center. Thus, each district sales manager estimates districtsales volume and expenses for the coming period and the district's contribution to overhead. This budget includesrent, heat, light, secretarial costs, and all other expenses of operating the district office. It includes the salaries ofthe sales personnel and the district manager, and all selling expenses incurred by the district. These districtbudgets are submitted to the divisional or regional office, where they are added together and are included with thedivisional budget. In turn, divisional budgets are submitted to the sales manager for the particular product ormarket group. At the end of this chain of subordinate budgets, the top sales executive compiles a companywidesales budget.

While the top sales executive and the subordinates have been preparing budgets, the staff departments in themarketing department have been doing the same, showing credits for work they expect to perform for the salesdepartment during the year. The office of the top marketing executive prepares its own budget, and this is thencombined with the budgets of the sales department and the staff marketing departments, to give a total of salesrevenues and of selling and other marketing expense for the company.

Each management level within the sales department approves the budgets for which it is responsible,incorporates them into its own budget, and submits this consolidated budget to the next higher level for approval.In each instance, detailed descriptions of the units’ plans for the coming period are submitted as support andjustification. Without this information, there is little basis for evaluating the budget submitted. When changes aremade in the sales budget, corresponding changes are made in the plans. For example, a cutback in funds requestedfor sales personnel might necessitate a reduction in the planned number of new "hires."

Other departments use the same preparation period to compile their budgets, with the sales and profitobjectives as their points of departure. The production department goes through a similar process of building up anexpense budget from each operating subdivision and combining these until a total department budget is prepared.The comptroller's division, research and development, personnel, and all other departments are simultaneouslygoing through the process of budget preparation. These departmental budgets are all submit ted to the president,who in turn submits a final total budget to the board of directors. Just as in the preparation of the sales budget, theprocess of preparing a total company budget may require modifications and changes in plans.

At each step in the budget-making process, an effort is made to reduce the detail to be passed upward to thenext step, so that the final company budget is relatively simple and undetailed. The approved budget is thendistributed downward in the organization in a process exactly the reverse of that used in its preparation. Eachsubordinate budget is revised to reflect changes in the company budget. At each step downward, detailspreviously deleted are added back. The lowest operating unit receives a final budget that is as detailed as the oneoriginally submitted, and it may be considerably changed.

Handling Competition for Available Funds within the Marketing DivisionThe top sales executive must argue effectively for an equitable share of funds from the marketing division. Thesales executive, like the advertising manager, marketing research manager, customer service manager, productmanagers, and other staff executives in the marketing department, submits a budget proposal to the chiefmarketing executive. From these proposals, the chief marketing executive selects those that are of the greatestpotential benefit and that the company can afford to implement. In discharging this function, the chief marketingexecutive checks to assure that the plans presented are the result of careful study, that the proposed expenditureswill enable the subordinate to carry out the plans, and that the forecasted sales are attainable.

The amount of money finally allocated to the sales department depends upon the value of the individualbudgetary proposals to the company as a whole. The sales executive keeps this in mind in dividing the salesdepartment's budget among subordinate departmental units. If a bottom-up planning procedure is in place, eachsubordinate has already prepared his or her own sales objectives and an estimate of expenses, thus simplifyingthe tasks of dividing up sales objectives and budgeted selling expenses.

"Selling" the Sales Budget to Top ManagementThe chief sales and marketing executives recognize that every budget proposal they make to top managementcompetes with proposals submitted by other divisions. Top management receives more proposals than it isfinancially able to carry out simultaneously. In appraising proposals, top management looks not only at intrinsicmerits but at the probable value to the whole organization. Consequently, it is necessary to sell the sales budgetto top management. The budget is presented to top management just as a salesperson makes a presentation to aprospect. It is safe to assume that top executives are at least partially ignorant of the problems faced by the salesdepartment, and of the many problems faced in putting together a sales program.

As in any other selling task, the starting point is a careful assessment of the wants and needs of theprospect. For the top executive, the major want is benefit to the company. How does the company, andincidentally the top executive, stand to gain from the proposed sales budget? To top management, the budget isa proposal to spend money to bring in profit. Top management divides the available funds among thedepartments, and the share each receives depends on the ability of the department head to sell his or her boss onthe benefits to accrue from the plan.


Using the Budget for Control PurposesOnce approved budgets are redistributed to all organizational units, budgetary control features go intooperation. Individual items in each budget serve as "quotas" or "standards" against which managementmeasures performance. From here on, each level of management compares performance against standards.

For control purposes, each sales manager receives budget progress reports. This report may be preparedmonthly, but control is more effective if progress reports are weekly. In this way, corrective action is initiatedbefore actual performance moves too far from budgeted performance. The report shows actual sales and expensesfor the week, the month to date, and the year to date; budgeted sales and expenses: and the difference between thetwo. Sales performance figures are broken down further in ways useful to the executives using them, for example,by product, by package size, by sales territory, or by customer.

When performance shows a variance from budgeted performance, two courses of action are available. Thefirst is to determine whether the variance is a result of poor performance by the sales group. It might be that asalesperson's travel expenses are out of line because of inefficient territorial coverage. In this case, steps would betaken to ensure that the salesperson organizes traveling more carefully, so that budgeted expenses are brought backinto line. However, if it turns out that travel expenses increased because of calls on new customers not previouslycovered, the second course of action would be the choice-revise the budget to reflect changed conditions.

The budget is not an end in itself, merely a tool. Every effort is made to bring performance into line withbudget estimates, but if unanticipated conditions occur, there is no hesitation about revising the budget. At thesame time, the budget is not changed too readily. If it is changed too much, it becomes a mere record of sales andexpense.

Effect of Errors in Budgetary EstimatesOperating conditions sometimes differ from those assumed at the time of budget preparation. Sales volume,expense, and net profit objectives prove too high or too low, either because of changes in the demand or because ofchanges in price levels. Particularly when estimates of the number of units to be sold differ from the number ofunits actually sold, significant variations occur in some expense items. Overhead and certain other expenses do notvary with volume, but some expenses, such as sales force commissions, vary directly with volume. Still otherexpenses, such as sales supervisory expenses, are semivariable, fluctuating with changes in volume, but notdirectly. If estimated unit sales volume is incorrect by much, the usefulness of budgeted selling expense figures asstandards of performance is impaired. The budget may still be useful as a point of departure in appraisingperformance, but there remains the puzzling matter of determining how to allow for changed conditions.

Flexibility in BudgetingIf sales budget estimates are consistently, or even frequently, greatly in error, it may be that more time should bespent in budgetary planning. Perhaps sales forecasting methods are misapplied or are inappropriate for thebudgeting situation. Experience shows that in most fields sales can be forecast for a sufficiently long period, andwithin limits of accuracy that are sufficiently close to serve the purpose of stabilizing production. If it is possible toforecast sales within the limits needed to stabilize production, it is possible to forecast sales within the limits ofaccuracy required for purposes of budgeting selling expenses.

Some companies, either intentionally or because of difficulties in securing accurate sales forecasts, usebudgetary procedures without definite forecasts. One way is to prepare alternative budgets, based on differentassumptions about the level of sales volume. Thus, efficiency can be evaluated, even though wide variation existsbetween expected volume and actual volume. "Low-volume" and "high-volume" forecasts are prepared on break-even style charts and interpolated to adjust for the difference between the two alternative budgeted sales figuresand the actual operating level.

However, "flexible budgeting" is the subject of considerable criticism, because whenever it is used, plansmust be made on the basis of a wide range of probabilities. Some experts refer to flexible budgeting as a crutch forweak executives who have not absorbed the art of forecasting. Most writers on sales management argue that someflexibility is desirable. Companies cannot authorize a year ahead expense appropriations so inflexible that there isno need later to review or revise them. Full advantage of new market opportunities must be taken as they appear. Ifcompetitors initiate actions not foreseen at budget-making time, funds must be allocated to counteract them. Arealistic attitude toward the dynamic character of the market is part of effective sales budgeting.

When the budget is in error because of faulty sales forecasting and badly set sales and profit objectives, theaccepted procedure is to alter estimates by applying standard ratios of costs to the adjusted volume figure. Thissystem, known as "variable" budgeting, is used by most businesses.

Documents

SALES TERRITORY...A sales territory helps in better sales planning and effective operational control. The number of salespeople recruited to cover a market has a direct bearing on