Budget quotas are set for various units in the sales organization to control expenses, gross margin, or net profit. The intention in setting budget quotas is to make it clear to sales personnel that their jobs consist of something more than obtaining sales volume. Budget quotas make personnel more conscious that the company is in business to make a profit. Expense quotas emphasize keeping expenses in alignment with sales volume, thus indirectly controlling gross margin and net profit contributions. Gross margin or net profit quotas emphasize margin and profit contributions, thus indirectly controlling sales expenses.
Expense quotas: The setting of dollar expense quota plans for reimbursing sales force expenses were analyzed earlier, so discussion here focuses on using expense quotas in appraising performance. Hardly ever are expense quotas used in lieu of other quotas; they are supplemental standards aimed toward keeping expenses in line with sales volume. Thus, expense quotas are used most often in combination with sales volume quotas.
Frequently, management provides sales personnel with financial incentives to control their own expenses. This is done either by tying performance against expense quotas directly to the compensation plan or by offering “expense bonuses” for lower expenses than the quotas. Expense quotas derive from expense estimates in territorial sales budgets. But to reduce the administrative burden and misunderstandings, expense quotas are generally expressed not in dollars 1 but as percentages of sales, thus directing attention both to sales volume and the costs of achieving it.
Setting expense quotas as sales volume percentages presents some problems. Variations in coverage difficulty and other environmental factors, as well f! as in sales potentials, make it impractical to set identical expense percentages for tall territories. Then, too, different sales personnel sell different product mixes, so some incur higher expenses than others, again making impractical the selling of identical expense percentages. But most important is that selling expense does not vary directly with sales volume, as is implicitly assumed with the expense percentage quota. Requiring that expenses vary proportionately with changes in sales volume may reduce selling incentive. It may happen, for in- stance, that selling expenses amount to 3 percent of sales up to $700,000 in sales, but obtaining an additional $50,000 in sales requires increased expenses of $2,500, which amounts to 5 percent of the marginal sales increase.
Clearly, management should not arbitrarily set percentage expense quotas. Analysis of territorial differences, product mixes in individual sales, and expense variations at various sales volume levels should precede actual quota setting. Furthermore, because of difficulties in making precise adjustments for these factors, and because of possible changes in territorial conditions during the operating period, administering an expense quota system calls for great flexibility.
The chief attraction of the expense quota is that it makes sales personnel more cost conscious and aware of their responsibilities for expense control. They are less apt to regard expense accounts as “swindle sheets” or vehicles for padding take-home pay. Instead, they look upon the expense quota as one standard used in evaluating their performance.
However, unless expense quotas are intelligently administered, sales personnel may become too cost conscious-they may stay at third-class hotels, patronize third-class restaurants, and avoid entertaining customers. Sales personnel should understand that, although expense money is not to be wasted, they are expected to make all reasonable expenditures. Well-managed companies, in fact, expect sales personnel to maintain standards of living in keeping with those of their customers.
Gross margin or net profit quotas: Companies not setting sales volume quotas often use gross margin or net profit quotas, shifting the emphasis to making gross margin or profit contributions. The rationale is that sales personnel operate more efficiently if they recognize those sales increases, expense reductions, or both, are important only if increased margins and profits result.
Gross margin or net profit quotas are appropriate when the product line contains both high- and low-margin items. In this situation, an equal volume increase in each of two products may have widely different effects upon margins and pr9fits. Low margin items are the easiest to sell; thus sales personnel taking the path of least resistance concentrate on them and give inadequate attention to more profitable products. One way to obtain better balanced sales mixtures is through gross margin or net profit quotas. However, the same results are achieved by setting individual sales volume quotas for different products, adjusting each quota to obtain the desired contributions.
Problems are met both in setting and administering gross margin or net profit quotas. If gross margin quotas are used, management must face the fact that sales personnel generally do not set prices and have no control over manufacturing costs; therefore, they are not responsible for gross margins. If net profit quotas are used, management must recognize that certain selling expenses, such as those of operating a branch office, are beyond the salesperson’s influence.
To overcome these complications, companies frequently set quotas in terms of “expected contribution” margins, this avoiding arbitrary all of expenses not under the control of sales personnel. Arriving at expected contribution margins for each salesperson, however, is complicated. Even if a company solves this accounting type problem, it faces further problems in administration. Sales personnel may have difficulties in grasping technical features of quota-setting procedures, and management may spend considerable time in ironing out misunderstandings. In addition, special records must be maintained to gather the needed performance information. Finally, because some expense factors are always beyond the control of sales personnel, arguments and disputes are inevitable. The company using gross margin or net profit quotas assumes increased clerical and administrative costs.
