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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
Managing for growth
Managing & protecting assets
Legal requirements/
compliance issues
Selling and Support services
In my cake shop, to sell 1,000 cakes, I break my expense down
into these 4 areas
My Cake Shop Example
Managing for growth
Managing for growth starts with the budget
To handle the increased sales volume
anticipated from the planning process
I also need a type of customer relationship management system.
Lastly, I need to hire a part time employee to
make sales call and send direct mail
Budget Telephone
Software Labor cost
Asset management includes the proper management of your cash, inventory, account receivables and
other physical assets
Managing & protecting 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
These are written processes accessible by all staff. These policies should be consulted
before extending credit
Your regular accounting system will most likely be able to effectively
handle this
Depending on the size of your accounts
receivable you may need to hire a staff just to manage receivables
A policy and procedure system
An accounting information system
A/R staff
Inventory management
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
A direct material budget/ previously discussed
An accounting information system: Your regular
accounting system will most likely be able to effectively handle this
Other assets
As we have moved from an industrialization age to knowledge age, financial reporting has to evolve to reflect it
The extent to which physical assets have to
be managed will depend on the type of
business
Physical assets
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
These are intangibles that can protected by the law. A business owner will need
legal consultation to effectively file for these
intangibles
Content developed creates additional value for the
business owner
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
knowledge management starts with the acquisition of knowledge, then using the
knowledge to create assets, refinement of knowledge,
storage and transfer
This is investment in physical assets to make the life of
employees more comfortable
Trademarks, copyrights, patents
Content management
Human resource intangibles Knowledge management
Employee Comforts
As an entrepreneur, it is your responsibility to find out your legal
requirements
Legal requirements/ compliance issues
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
Business entity laws
It is advisable to solicit the help of an attorney
Since My Cake Shop, is still very small, legal requirements and compliance obligations will be
outsourced to an accounting and law firm
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
Selling and Support services
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
When budgeting for selling and administrative expenses, it is important to budget for the
labor cost separately. This will enable you to effectively access your labor needs
Steps to budgeting for selling and administrative expenses
Break your business activities into the 4 key
performance area
List the activities needed for each key
performance area based on what it will take to meet your sales figure
List the vendors that provide services for
each activityRank them in relevance
To budget for non-labor selling and administrative expenses,
follow these steps
Estimate how much it will cost to
execute the activity
Separate the fixed cost from variable cost
For fixed cost
For variable cost
Figure out the cost of one unit of the activity
Determine a buffer
Predict total cost based on activity level
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
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
Break your business activities into the 4 key performance area
List the activities needed for each key performance area based on what it will take to meet your
sales figure
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
Rank them in relevance – on a scale of 1-10, how important are
they in performing each designated activity. For each
activity consider
Steps to creating the selling & administrative labor budget
Examine workload and relevance of job
Can an employee be shifted into a new area
more relevant to the business growth
Are employees stretched
Is there any training you can provide to help
employees become more efficient with the
job
Can you consolidate job functions so as to
improve relationships with customers
Can you outsource part of their job function
and divert the employee to more productive tasks
Separate the fixed salaries from variable salaries
Write salary by employee
(including any proposed raise)
For variable cost
Figure out the pay per hour
Multiply this by the total estimated hours
needed
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
However If an employee scores below average on all
functions, and you have tried training, you might want to consider letting
them go
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
Summary
MORE INFORMATION
www.mybusinesskpi.com/SellingAdministrativeBudget.html
www.mybusinesskpi.com
Email: evelyn@mybusinessskpicoach.com
Phone: (417) 812-5945
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