Consult your sales compensation plan when developing revenue and expense models for your company’s budget
Whether you are a for-profit or a not-for-profit organization you must have one or more sources of revenue in order to operate. This revenue is the result of one or more functions in the organization, whose primary responsibility is to create business opportunities that will translate into sales of products and services and in the case of not-for-profit organizations, in obtaining grants, donations and other contributions from government and corporate entities, as well as from private donors.
The sales organization is tasked with generating sales leads and qualifying these leads for prospecting, follow up, and pursuit of customer purchase commitments. Nowadays, you’d be hard pressed to find a sales organization that does not use CRM (Customer Relations Management) software. Many of the CRM solutions nicely integrate into the company’s ERP software, where new leads that become customers can have sale quotes converted into sales orders, triggering supply chain actions, shipping and manufacturing activities and ending with customer billings and collections.
In an earlier blog we saw how data from the CRM software can be used in developing a plan and budget. In an application using intelligent planning technology this can be accomplished using data links containing pre-defined drivers, and dependencies on other budget records and values.
One of several innovative sales automation tools, provided by RingDNA (www.ringdna.com) is designed to integrate with an existing CRM solution (primarily SalesForce) and provide tools to allow sales reps to reach more prospects and be more effective in their sales process, perform call analytics and obtain other benefits in both inbound and outbound sales call environments.
In their blog, there is an entry about salespersons’ compensation plans and examples on how to structure them. It is titled: “5 Inside Sales Compensation Plan Examples that will Motivate your Reps to Win Revenue” (published on May 17, 2016 and authored by Jesse Davis). The reason I am mentioning this company and their product offering is that the author of the blog entry states when referring to sales persons that: “Their compensation plan can make the difference between sales being a revenue or cost center.”
This is a great way to express the idea that a salesperson’s compensation plan can greatly determine not only the sales commission expense but primarily the success of the company in achieving their sales goals, as communicated in their plan and budget.
The revenue forecast is invariably the most important piece of the budget. Its input is based on a myriad of assumptions, opinions, input from strategic plans, existing backlog, sales history, educated guesses and more. Here, again, the use of drivers, KPIs and data link sources is one of the cornerstones of the sales forecast.
However, there is one other input that can affect how sales forecasts (and certain expenses) are developed and that is the company sales compensation plan. This plan outlines the various participating functions in the plan, such as: Lead Qualification personnel, Sales Development Reps (SDRs), Account Executives (those who actually close sales) and other functions, depending on the company structure and industry.
The compensation plan defines sales quotas, base compensation, commission-based compensation and other compensation components. Using your company-wide sales quota is another way to validate the reasonableness of the sales projections.
Since the compensation plan outlines the commission structure, it can be used to develop the sales commission expense budget. Here again, a set of drivers or values derived from data links can be applied to drive this expense line.
Using the company’s sales compensation plan as a guideline in the development of these important components of the financial plan and budget is a good way to ensure that the financial plan and budget are going to be sensible, realistic and in close alignment with the company’s strategic plan and goals.
Alan Hart – Bio
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he assists small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.