THE SELLING & ADMINISTRATIVE BUDGET

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THE SELLING & ADMINISTRATIVE BUDGET

We have talked about how to create a budget that coincides with making your product (product cost). What about the budget coincidental to selling and administering the existence of your product. The administrative budget consists of those expenses necessary to run your business but not needed to make your product. Example accounting fees, secretary, office, etc. The selling budget consists of expenses needed to sell the number of unit you plan to make. It should consists of retention and acquisition efforts.

Selling and administrative expenses can have a big impact on net income, thereby expenses here, need to be watched very carefully. It is important to create this budget by examining expense by vendor and ensuring each expense is still relevant to the smooth running of your business. It is possible to subscribe to services you needed in one year but bears no relevance to the next. However, because the fees are automatically deducted you still bear the expense.

The selling and administrative budget applies to both product and service businesses.

Budgeting for selling and administrative expenses

When it comes to selling and administrative areas, there are 4 key performance areas a business should be concerned about namely:

  1. Managing for growth
  2. Managing & protecting assets
  3. Legal requirements/ compliance issues
  4. Selling and Support services

Once you identify your key performance areas, your next step will be to list the activities and labor requirements needed in each key area. Do not forget to account for time needed to create the budget. The other activities are outflow of the budget.

My Cake Shop Example

In my cake shop, to sell 1,000 cakes,  I break my expense down into these 4 areas:

Managing for growth

  • Budget: Managing for growth starts with the budget.
  • Telephone: After creating my business plan and budget, I discover that in order to handle the sales call volume, I will need a phone system that can take up to 50 calls on a time while giving the customers automated options to take care of common issues themselves. This will cut down on the time me or my staff will have to spend answering phone calls.
  • Software: I also need a type of customer relationship management system. My fee to subscribe to such a system will be $500 per year.
  • Labor cost: I also need to hire a part time employee to make sales call and send direct mail.

Managing & protecting assets

Asset management includes the proper management of your cash, inventory, account receivables and other physical assets.

Cash management involves 

  • Making sure payments are made and deposited
  • Recording the inflow and outflow of cash in the accounting information system.
  • Creating weekly cash forecast to optimize the smooth running of the business
  • Investing excess cash to increase returns

Accounts receivable management involves:

A good accounts receivable management system starts with good policies and procedures. It is detrimental to start offering credit to customers before thinking about how you are going to get your money back. You also should not offer credit to customers who never pay their bills.

Accounts receivable is created when you perform work or provide a product to a customer in exchange for a promise to pay. It does not mean collecting money before work is completed. When this happens you have unearned income. This means that you now owe the customer either the obligation to complete the services or product paid for or refund their money. To effectively manage accounts receivable you need:

  • A policy and procedure system: these are written processes accessible by all staff. These policies should be consulted before extending credit.
  • An accounting information system: Your regular accounting system will most likely be able to effectively handle this. However, sometimes entrepreneurs find it beneficial to manage their accounts receivable outside their main accounting software. If this is the case, it is important to ensure your software is compatible for syncing purposes.
  • A/R staff: depending on the size of your accounts receivable you may need to hire a staff just to manage receivables.

Inventory management:

When you talked about direct materials, we talked about inventory. Besides making sure that you buy the right amount of inventory and pay the right price, someone needs to oversee the flow of inventory.  Someone has to be responsible for counting inventory, recording the quantity in the system. Also, you might need specialized software to manage inventory depending on how much inventory you carry. To effectively manage inventory you will need:

  • direct material budget/ previously discussed.
  • An accounting information system: Your regular accounting system will most likely be able to effectively handle this. However, sometimes entrepreneurs find it beneficial to manage inventory outside their main accounting software. If this is the case, it is important to ensure your software is compatible for syncing purposes. This accounting information system will play a big role in ensuring that inventory level keeps to the forecast. It also makes sure adjustments are made if actual revenue is below or above forecast.

Other assets

As we have moved from an industrialization age to knowledge age, financial reporting has to evolve to reflect it.  Other assets on a business’s balance sheet no longer includes just physical assets like building and furniture but should also include intangible assets.

Physical assets: The extent to which physical assets have to be managed will depend on the type of business. For real estate businesses the most valuable assets are the properties, for restaurants/ bakeries it will be the kitchen equipment. Managing assets involves developing a maintenance schedule, timely fixing of assets, etc.

Cost associated with managing assets include:

  • Repairs and maintenance cost: the routine repairs needed and following the maintenance schedule. Physical assets that follow a maintenance schedule last longer and are more reliable.

Intangible assets: includes the management of:

  • Trademarks, copyrights, patents: These are intangibles that can protected by the law. A business owner will need legal consultation to effectively file for these intangibles.
  • Content management: content developed creates additional value for the business owner. To manage content, a business owner will need a content management platform and database.
  • Human resource intangibles: include those activities used to increase the retention of your staff. High turnover is very costly to a business. And intangibles could be a great way to bridge that gap. Human resource intangibles could be broken down into 2 main categories:
  • Knowledge management: Knowledge:  knowledge management starts with the acquisition of knowledge, then using the knowledge to create assets, refinement of knowledge, storage and transfer. Proper knowledge management gives birth to innovation and promotes shared/ collective learning. The general outcome is an organizational culture with entrepreneurial spirit and improved relations with fellow employees, customers and vendors which leads to overall improved business performance. Happier employees are the key to customer retention. To effectively manage knowledge in a business, processes and procedures integrated into daily business practices must be created. Also, additional software must be purchased to secure content.
  • Employee Comforts: this is investment in physical assets to make the life of employees more comfy. For example, a gym, more comfortable chairs, etc. The difference between what is actually needed to perform the job versus what you buy is an intangible benefit.

My Cake Shop will be purchasing software to manage assets. The business is still small enough where a couple of hours, software and occasional consulting with an accountant will do.

Legal requirements/ compliance issues

As an entrepreneur, it is your responsibility to find out your legal requirements. You must develop systems to comply with this law or your business could be shut down. Most common laws business owners need to comply with are:

  • Tax laws
  • Human resource laws – minimum age requirements, minimum wage, payroll laws etc.
  • Business entity laws – the business structure you choose to operate in has specific set of rules you must comply with.
  • It is advisable to solicit the help of an attorney and accountant in navigating these laws. Trying to navigate it all on your own could cost you more lately.

Since My Cake Shop, is still very small, legal requirements and compliance obligations will be outsourced to an accounting and law firm.

Selling and Support services

It is not enough to make your products, you need customers to sell your products to. This could mean hiring a customer service rep, having a place to conduct your business (rent, utilities, insurance), hiring a sales force. Advertising in print and on social media, packaging the product for shipping.

All other activities besides making the product and selling the product falls under the administrative support overhead. Administrative support tasks include activities like answering phone calls and just making sure the little day to day task are accomplished.

In addition, investments made to improve the skill set are included as part of selling and administrative support expenses.

My Cake Shop selling and support activities are as follows:

  • Attend workshops on customer service and how to influence others. This includes  travel and meals.
  • Central hub for employees to sync processes. Get economically space.
  • Space to communicate with customers
  • Shipping expense
  • Attend conferences on leadership and growth

Steps to budgeting for selling and administrative expenses:

When budgeting for selling and administrative expenses, it is important to budget for the labor cost than you will the non labor cost. This will enable you to effectively access your labor needs.

To budget for non-labor selling and administrative expenses, follow these steps:

  1.  Break your business activities into the 4 key performance area
  2.  List the activities needed for each key performance area based on what it will take to meet your sales figure
  3.  List the vendors that provide  services for each activity
  4. Rank them in relevance – on a scale of 1-10, how important are they in performing the function they are designated to – consider what you get in return for what you pay:

Can you get these services or products for less without a decline in quality

 Is the vendor attentive to your needs as a customer

 Do you have a solid relationship with this vendor

Can you consolidate vendors so as to improve relationships which may privy you to deals available only to good customers 

5. Separate the fixed cost from variable cost

  • For fixed cost: estimate how much it will cost to execute the activity. In other words, what you pay the vendor each month. Since this amount is fixed per vendor, there is no need to apply the overhead formula discussed in the overhead section.
  • For variable cost:
  •   Figure out the cost of one unit of the activity
  • §  Determine a buffer
  • §  Predict total cost based on activity level

Selling & Admin Variable Overhead cost =Activity level * buffer percentage * cost per unit.

Eliminate Non Relevant Vendors

  • Any vendor in your current system who did not make it to the list is not relevant to your future success. If you have a subscription with this vendor, be sure to cancel it.
  • If a vendor performs more than one service, find an average score of all the services they provide, for example ABC corp in the diagram below provides 4 different services. Add the scores of all services together to get 34 and divide by 4 to get 8.5
  • If a vendor average score is less than 7, be sure to investigate alternatives. You want to maximize the benefits you get for what you pay.

Creating the budget for selling and administrative labor

Next, budget selling and administrative expenses based on your sales forecast. In other words, how much would you need to bring the sales forecast to reality? Do you plan to hire sales people? Remember the formula to determine labor cost:

Direct Labor = Number of hours needed * Price per hour

Number of hours needed = Number of hours needed to bring sales forecast to reality * percentage discount for skilled labor set

Price per hour = Average market price * premium for skill sets with limited supply

This formula holds true when specialized skills are needed. Most administrative jobs are easy enough that specialized skills are not needed. So the formula for administrative labor can be broken down to:

Direct Labor = Number of hours needed * Price per hour

However, be sure to account for skill surpluses and shortages if this is applicable to your business

Steps to creating the selling & administrative labor budget:

  1. Break your business activities into the 4 key performance area
  2. List the activities needed for each key performance area based on what it will take to meet your sales figure
  3. List the employees that provide services for each activity (contractors and vendors are part of your other overhead. Only services you perform in-house either by you or employee are listed here
  4. Rank them in relevance – on a scale of 1-10, how important are they in performing each designated activity. For each activity consider:

Examine workload and relevance of job

Can an employee be shifted into a new area more relevant to the business growth

Are employees stretched

Do you need additional employees to bring sales forecast to past

Can you outsource part of their job function and divert the employee to more productive tasks. If outsourcing is possible, add an outsourcing or automation cost to the non-labor budget and adjust your labor requirements accordingly.

Can you consolidate job functions so as to improve relationships with customers

 Is there any training you can provide to help employees become more efficient with the job

5. Separate the fixed salaries from variable salaries

  • Write salary by employee (including any proposed raise)
  • For variable cost:
  1.    Figure out the pay per hour
  2.    Multiply this  by the total estimated hours needed
  3.  If sales commission is part of sales structure, multiple commission rate by estimated sales

Notes for employees

If an employee performs a job function poorly, you might consider additional training, outsourcing or shifting the responsibility to another employee who performs it well. I believe in retaining hard working employees. Do not be too quick to let hardworking employees go because they perform an aspect of their job poorly. You can train, outsource or delegate to another employee the functions they do not perform as well. The budgeting period is a great time to evaluate changes you want for the coming year.

However If an employee scores below average on all functions, and you have tried training, you might want to consider letting them go. You are not doing the employee a favor by letting them say. They might not be a good fit for your business but might be a great fit for another.

Excel Worksheet Summary

Get the worksheet here

Not accounting for all activities brings about stress because you will have to take time for doing things that you did not account for. If one of the major activities is greeting customers as they walk in, then it is important time and expense for that be allocated. Do not leave anything to change. Also create a buffer in your budget because things do not always go as planned.

Summary

A budget helps you sort out the must haves, from the nice to have. With a budget you can evaluate the impact of an expense before you ever spend a dollar.

The selling and administrative budget is important because this is where a lot of expenses sneak into the business. If these expenses are not carefully evaluated, overtime expenses that are no longer relevant to sustaining your business stay on your income statement and reduce your profit. The goal is to operate as slim as possible. The less overhead you have, the more nimble you are!!!!

By | 2018-04-22T11:08:41+00:00 July 7th, 2017|Comments Off on THE SELLING & ADMINISTRATIVE BUDGET

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Telephone: 417-812-5945

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