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Learn how to effectively build, maintain, and optimize your sales pipeline. The percentage of sales method, while useful, doesn’t cover every financial aspect of a business. Because of this, there are two additional methods we want to look at when calculating financial health: the percentage of credit sales method and the percentage of receivables method. Percentage of credit sales methodCredit sales carry a great deal of risk despite their convenience, including processing fees. One of the largest risks is bad credit expense. Bad credit expense refers to purchases that go uncollected due to credit card complications on the customer end. Larger companies allow for a certain percentage of bad credit in their financial analysis, but many small businesses don’t, and it can lead to unrealistic projections and unforeseen loss. To calculate your potential bad debts expense (BDE), simply multiply your total credit sales by the percentage you anticipate losing. Let’s look at Liz again. With a revenue of $60,000, she’s not running a corporation, but she should still expect to run into a small amount of bad debt expense. By looking over her records, she finds that for the month, her credit purchases come to $55,000 (with $5,000 cash). She estimates that approximately 2 percent of her credit sales may come back faulty. Therefore, her BDE formula looks like this: BDE = 2% x $55,000 This leads to a total BDE of $1,100. This number may seem small, but it’s crucial when you remember that she’s hoping for an increase of sales next month of $1,978. With a BDE of $1,100, she might be looking at merely an extra $878, which significantly impacts any new purchases she might be looking to make. Percentage of receivables methodThe percentage of receivables method is similar to the percentage of credit sales method, except that it looks at percentages over smaller time frames rather than a flat rate of BDE. This method is widely considered more effective and referred to as ‘accounts receivable aging.’ For this method, rather than taking the percentage of potential BDE from the entire period (let’s stick with a month, for ease), the percentage of receivables method breaks down the percentages into smaller time frames within a period and only focuses on the amounts unpaid from that period. For a month, this might look like this: This method is seen as more reliable because it breaks down the probability of BDE by the length of time past-due. There is a lower chance that recent purchases won’t be settled by the credit card companies than purchases over a month out. This allows for a more precise understanding of what money may be lost. How Zendesk’s CRM software can helpWhen performing any financial calculations, accurate data is your number-one priority. With Zendesk Sell, keeping track of your customers and your transactions is easy. Our CRM platform is user-friendly, compatible with existing software, and workable with hundreds of additional software companies. Best of all, we offer a free trial of our services. Request a demo here.
When thinking about how to market their business, the number one question on the minds of most business owners is, "How much should I spend?" The simplest and most common way to establish a marketing budget is to use a percentage of sales. While it would be nice to have an across-the-board recommendation for what percentage to use, there are several factors that go into determining what percentage of sales to budget towards marketing for a particular business.
The recommended marketing budget, as a percent of sales, varies by industry, although a majority of companies stay under 15 percent of sales.
Marketing budgets have a broad range from business to business, falling anywhere between 1 percent and 25 percent of sales revenue. However, according to a study conducted by the CMO Council, a professional organization for Chief Marketing Officers, a large number of businesses marketing budgets are under 15 percent of sales revenue.
A very small percentage of businesses, mainly consumer packaged goods companies, are spending above 20 percent. It is safe to say that businesses should be spending at least between 1 percent and 10 percent of sales revenue on marketing, in order to execute an effective marketing plan.
The volume of sales a business does can have a significant impact on what percentage of sales revenue they will use for marketing. Walmart, for example, spends around $3 billion each year on advertising, but this equates to less than 1 percent of the company's annual sales revenue of approximately $500 billion.
Because of Walmart's significantly high volume of sales, a budget of 1 percent of sales is a substantial advertising budget amount that can accomplish the same brand building and marketing ROI as another retailer's larger percentage. The higher the volume of sales a business does, the lower the percentage of sales they can expect to spend.
It costs more to market new products than it costs to market existing products. Therefore, if a business is launching a new product or product line, the percentage of annual sales revenue they will need to budget towards marketing could be up to 20 percent, rather than a company that is spending marketing dollars to continue to promote an established product line. In this same vein, how quickly a company wants to grow and expand will also determine how much needs to be spent towards marketing and advertising.
With almost 50 percent of marketing funds going towards building brand awareness, companies that have established a strong brand in their given markets have a competitive edge when it comes to how much they will have to spend to maintain their brand awareness. If a company's target market is not familiar with either the company itself or the brand of products or services that company offers, the percentage of sales revenue budgeted towards marketing will need to be higher.
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The percentage-of-sales method is used to develop a budgeted set of financial statements. Each historical expense is converted into a percentage of net sales, and these percentages are then applied to the forecasted sales level in the budget period. For example, if the historical cost of goods sold as a percentage of sales has been 42%, then the same percentage is applied to the forecasted sales level. The approach can also be used to forecast some balance sheet items, such as accounts receivable, accounts payable, and inventory. The basic steps to follow for this method are:
For this method to yield accurate forecasts, it is best to apply it only to selected expenses and balance sheet items that have a proven record of closely correlating with sales. Outside of these items, it is better to develop a detailed, line-by-line forecast that incorporates other factors than just the sales level. This more selective approach tends to yield budgets that more closely predict actual results. Advantages of the Percentage-of-Sales MethodThe advantages of the percentage-of-sales method are as follows:
Disadvantages of the Percentage-of-Sales MethodHowever, these advantages are more than offset by several major disadvantages, which are:
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