THE SELLING & ADMINISTRATIVE BUDGET

Selling and administrative expenses can have a big impact

on net income

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

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

An Example

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

Excel Worksheet Summary

Get the worksheet here

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

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Email: evelyn@mybusinessskpicoach.com

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