Category: University of Mumbai BMS Notes

Distribution costs are bound to go up not only with increase in the volume of sales but also with the efforts towards achieving higher market share through better coverage and penetration into new markets. Complete elimination of distribution cost is not possible.

(a) How far is the distribution channels-mix adequate to enable the company to improve upon its market share?

(b) Whether the total cost of distribution is kept to the minimum.

As regards the minimizing the cost of distribution the following aspects are to carefully consider:

(i) The major elements of distribution cost, are transportation, warehousing including storage insurance, material handling, credit and collection, finance and administration (invoicing, data processing) and interest on inventory carried at different selling points.

(ii) Distribution costs may be classified as fixed (Salaries of distribution staff, warehouse rent), semi-variable (travelling of staff, stationary and telephone charges) and variable packaging, insurance, transportation, interest on inventories. Budgets and norms should be established for each such major item of expense, under each category, and actual figures watched regularly may be on monthly basis.

(iii) Use of material handling equipment in warehousing, mechanized invoicing system, inventory control methods will help in cost reduction.

(iv) The overall distribution systems should be subjected to a thorough and objective review at regular intervals. This review will show up the resources of inefficiencies. Any significant change in the mode of distribution should be subjected to a detailed financial evaluation by cost benefit analysis.

(v) Optimum Channels of distribution—Many alternative channels are available and the choice made will greatly affect distribution costs and efficiency. Moreover as a firm’s output grows, it is necessary to reconsider what channels can provide more efficient distribution and to revamp the structure of discounts and commissions.

(vi) Adopt profit and loss system for branches, individual salesman, product departments.

A distribution policy is the strategy applied by a company for the correct shipment of its products from the production chain to its positioning in the market.

Distribution policies refer to the measures taken by a company, from manufacturing to packaging and final transport stages, to ensure the product reaches the most appropriate channels and points of sale; and does so within the planned launch and product replenishment times.

Like all processes having a lot of intermediaries, it’s important to design a good strategy to get your product into the hands of the customer quickly and avoiding bottlenecks.

Depending on your type of business and product, it may be that there are fewer phases than those we mentioned; and that, for example, you sell your catalog directly to retailers.

It doesn’t matter how many people or steps there are in your distribution chain. The key is for you to define clearly in advance, how they will communicate with each other and how products will be passed on at each stage.

Types of distribution policies

A distribution and sales policy is classified according to the number of intermediaries involved, which makes it more (or less) complex to manage.

Direct policy: You sell your products directly to the customer and by means of a simple strategy, as a single sales channel (that is, your own physical or online store).

Indirect policy: You distribute your products through several intermediaries and channels.

Intensive policy: This is the most wide-ranging strategy, as it includes a larger number of intermediaries and channels. Its degree of complexity depends on how ambitious you are: do you want to sell internationally, for which you will need diverse distributors? Will you be betting on an all-channel strategy that integrates physical and digital channels, in which case you’ll need to direct more effort towards your warehouses and contacting a large number of sellers?

Selective policy: You only distribute your products through a limited number of channels (such as, only physical stores or only online marketplaces), or in a small geographical network (a country or a city).

Exclusive policy: This involves you granting the distribution rights of your products exclusively to one channel or outlet. It can be your branded online store or a retailer with whom you reach an agreement. This type of distribution is common in brands with a very specific target or selling luxury products, in order to feed their image of prestige; for example, certain Bulgari jewelry that can only be found at Harrods in London.

Factors to consider for policy Design

• What kind of product it is, because if it’s made of perishable material you’ll need faster distribution to avoid accumulating expired stock. If the product is delicate or hazardous, you’ll need special insurance and transport for it.
• Where your end customers buy, whether through physical or digital channels, or both.
• Whether your product needs demonstrations and tutorials in person, by sales reps.
• Whether your product supports customization, and how you can best offer this (yourself or through another participant).

Members participating in a distribution and sales policy:

• Representatives: These agents can speak for your business and bring your products closer to customers, companies and/or other intermediaries. As reps are the public face of the company they should be well trained in sales goals and brand philosophy as well as familiar with the product, thus enabling them to identify opportunities for new channels of distribution or sales. They can also handle logistics and special contracts.
• Wholesalers and distributors: These are the intermediaries who purchase your products in large quantities to distribute them among other sellers or channels. Study carefully what their work networks are like and whether they will position your products in the places that interest you most.
• Retailers or Sellers: Retailers purchase products from wholesalers or distributors in order to sell them in their physical stores or through digital channels (an online store, or a marketplace dealing with a variety of brands).
• Partners: These act as sales reps, although they will not sell your product directly. It is increasingly beneficial to include marketing agents in a distribution strategy, as your partner network can act as an ambassador for your product or brand to other companies or customers.

Distribution costs (also known as “Distribution Expenses”) are usually defined as the costs incurred to deliver the product from the production unit to the end user.

For any company which is involved in distribution, distribution cost is a major bottleneck. There are many different distribution expenses which must be taken care of. Furthermore, these expenses are not consistent and may change from time to time thereby changing the distribution cost as well.

Distribution expenses: The individual expenses made by the company for various reasons is known as Distribution expenses. These are individual or repeated transactions happening over time. An example may include – Rent, Salaries, Administrative expenses etc. All these are individual transactions or repeat transactions and these transactions can be called distribution expenses.

Distribution cost: The combination of all distribution expenses made by a company is known as Distribution cost. So continuing the above example – the total of rent, salaries, and administrative expenses will be considered as distribution cost. In terms of Formula

[The sum of all Distribution Expenses] = Distribution cost

1) Direct Selling Expenses

Any expense made towards selling the product to the target customer is a direct selling. Many manufacturers, wholesalers, and distributors carry out direct selling in the regions that they want to expand. They also would like to know the distribution cost of that region. Thus, they consider all direct selling expenses as the primary expense made by the firm.

Such Expenses will include: Salary of Field Salespeople (only for target customer sales), Travel of salespeople, Entertainment for sub-dealers, Training costs, Postage or office supplies needed for sales etc. All these different headers are categorized as direct selling expenses. They are one of the major contributors to distribution cost. The more you spend in sales, ultimately the more profit you will have.

2) Advertising & Sales promotion expenses

If a company wants to establish itself in a new region, it needs to have OOH advertising, it needs to run in-store branding, it needs to run ads in local newspapers or local channels. Thus, the company will be spending a lot towards advertising and promotions which are various forms of distribution expenses.

3) Product and Packaging expenses

The product packaging was good but was not strong. As a result, the packaging suffered a huge wear and tear by the time it reached the customer and the customers returned the product.

This caused a huge loss to the company and they ultimately came up with a plan to have a different and sturdy form of packaging for Online sales. Such packaging is obviously a cost to the company and should be added as one of the distribution expenses. Besides this, some other forms of product costs include raw materials, depreciation of the product in stock, salaries for employees involved in product development or related to product and packaging.

4) Trade discounts

Besides sales promotion exercises like advertising and marketing, a company launches several trade promotional exercises as well. This includes giving discounts to retailers, distributors, and suppliers on achieving certain targets.

Other type includes discounts on picking certain quantities of products (example picking a bulk of 1000 units will give 2% additional discount). Thus, Quantity discounts, sales allowances, and other such trade discounts are considered as distribution expenses and ultimately distribution cost.

5) Credit, Outstanding and Overdue

A distributor who operates in a regional market needs the huge amount of money to conduct business. To arrange this money, the distributor takes a loan from the banks. This is known as an Overdue account. Hypothetically, If the distributor takes 1 lakh from the bank, within 30 days he should give back 1 lakh + 1% interest. Thus, a dealer suffers a loss when his money does not come back from the market in time.

As a result, Overdue accounts, Market outstanding and credit are given in the market to contribute to the distribution cost. The more credit given in the market, the higher is the value of interest applied. There are also expenses towards collecting the outstanding from the market and to close all bad debt. Thus, all these distribution expenses related to credits, outstanding and overdue contribute to distribution cost and must be taken into account.

6) Market research

When reputed companies like Samsung, LG or Sony want to establish themselves in a new market, they buy market research reports from the likes of IMRB or Nielson. These reports may cost hundreds or thousands of dollars. Not only in a new market, even in an old market, a company might want to conduct a satisfaction survey or a survey of new ideas regarding distribution.

The company might find in this survey that the time taken for delivery is quite high. Or it may find that other companies are giving higher credit, therefore resulting in loss of sale for a parent company. In all this, the market research costs are generally kept up to a percentage of the total profits or revenue of the company. So market research cost for a branded company might be 1% of revenue.

7) Warehousing and handling within warehouse

Warehousing is a major cost of distribution. When a company expands to newer markets, it needs to have new warehouses in each new territory. Domino’s or McDonald’s practically have warehouses for every 3-4 towns so that they can supply to local retail outlets very fast. Because of Domino’s and McDonald’s handle frozen goods (burgers or fries), their expenses are even higher because they need cold rooms and cold chains to deliver the products.

8) Shipping and Delivery

With the rise of E-commerce, delivery is a huge focus area for all manufacturers. The stock must be in the market – whether it is on an E-commerce portal or in a retail outlet or with the distributor. Everyone knows that if there is no stock on display, the sale will not happen and this creates friction between the different distribution channels.

Thus, Shipping and delivery are important to the firm and hence companies ensure they are operating above capacity. Companies can choose to use their own transportation and company-owned trucks or they can use outsourced transportation. Retail chains generally use their own transportation within warehouses due to regular movements of goods. Consumer durables and FMCG use outsourced transportation because the movement of goods is erratic.

9) Commercials & Accountancy

It is a government requirement to present all your sales and purchases as well as balance and profit sheets to the government to determine profit earned by your firm. Furthermore, these statements are also important for the firm itself to note the growth year on year as well as to determine the performance and future potential. Thus, commercials and accounts are documented precisely in any firm.

The distribution expenses towards commercials and accountancy include, Processing of orders and maintaining accounts receivables, sales invoices, payment proof’s, clerical jobs, invoicing and accountancy software, printing and stationery expenses, utility expenses. All these expenses together form the distribution cost of commercials and accountancy.

10) Customer Service

In the industrial segment, there exist industrial distributors who take care of both – Sales and service of the product. In such cases, it is the distributor who must take care of the service of the product as well. As a result, customer service expenses become distribution expenses and contribute to distribution cost.

The running of a customer service centre, the salaries of customer service executives, the utilities and tools required, specialized equipment, rent, electricity, administrative and clerical expenses are all various distribution expenses filed under customer service.

11) Sales returns

If a dealer or a retailer rejects a material, then the material comes back to the manufacturer provided it is in the returns policy of the company. This returned material may have come back due to cosmetic conditions (it was damaged or dented) or it may have come back due to performance issues. In any condition, the returned product is a cost to the company.

The company can either repair the cosmetic damage, reutilize the product again or sell it off at a discounted rate. In case of performance issues too, the product can be repaired or recycled or sold off. The distribution expenses of sales returns include freight of bringing damaged products back, repairing of the product, loss due to discounted sale, loss due to recycling of the product, bad inventory in stock, clerical or other administrative expenses towards handling sales return.

1. Factors Related to Products:

Product is a prime factor in channel selection. Product-related factors are among most relevant and powerful factors affecting channel decision. Channel must be fit the type and nature of company’s products.

• Perishability of Product:

Perishable products must be sold and consumed immediately after production. So, for perishable products, normally, direct or short channel is advisable. For durable products, indirect or multilevel channel is preferable. However, due to availability of rapid means of transportation and advanced cold storage facilities, the perishable product can also be sold by long-indirect channels.

Technical Aspects:

Technical products cannot be used without sufficient information and direct supervision. Even, they need more frequent services. It is advisable to adopt indirect and multilevel channels to assist consumers to use the technical product properly and safely. For simple products, direct channels can be used.

• New v/s Existing Product:

Consumers need more information and attention for new products. More efforts and time are required to convince consumers. As a result, a company may opt for indirect channel to take help of middlemen in this task. For existing products, the company can use direct and/or indirect channels.

Complexity and Risk Related to Use of Product:

Complex and risky products are sold via middlemen as consumers expect more direct supervision and assistance.

• Size of Product:

In case of heavy and bulky products, direct or short channel is more suitable. This is due to difficulties related to physical movement of the product.

• Divisibility of Product:

Mostly, indivisible products are distributed directly to customers. Divisible products can be conveniently distributed by middlemen.

• Unit Price of Product:

Precious products, like gold, jewellery, certain chemicals, software, etc., are distributed using direct or short channels of distribution. Use of direct and short channel can minimize risk of theft or robbery.

• Legal Aspect:

Quite obviously, permitted (legal) products can be distributed by any convenient channel of distribution. But, illegal products are distributed by direct channels for secrecy purpose.

2. Factors Related to Company:

Company’s internal situations have direct impact on choice of marketing channel. Manager has to analyze company-related factors to decide the best fit channel(s).

• Company’s Financial Position:

Financially sound companies can maintain separate and well-equipped departments for distribution of products. Such companies can open and manage own retail outlets and can hire salesmen to manage distribution effectively. They do not require services of middlemen and, hence, can distribute the product directly. But, financially weak companies have to opt for indirect channels to share resources and expertise of channel members.

• Product Mix of Company:

A company’s product mix consists of product lines and product items in each product line. Many product lines and several product items/ varieties in each of the product lines can enable the firm to offer multiple choices to a large number of consumers. Even, the firm can take benefit of the scale of economy. In such case, direct channels are more advisable. Small companies with limited product lines and/or product items should distribute products via wholesalers and retailers, who sell products of many companies.

• Desire for Control:

If a company desires to have direct and close control over production and selling activities, direct channels are preferred and vice-versa.

• Experience and Expertise:

Successful distribution needs considerable experience and expertise. If a company possesses necessary experience, expertise, and staff, it can manage selling activities by its own. When a company lacks such experience and skills, it has to involve middlemen, and prefers indirect channels.

• Facilities and Staff:

Sufficient facilities and capable staff are essential for effective distribution of products. If a company manages for needed facilities and staff, direct channels are used, otherwise indirect channels are used.

• Company’s Past Experience:

A company’s past experience can also affect channel decision. When a company has favourable and satisfactory experience to work with middlemen, it may continue working with them. In case, if it is not satisfied with terms and services of middlemen, it would shorten its channel of distribution.

3. Factors Related to Middlemen:

Companies consider several middlemen-related factors while deciding on channels.

Most common factors include:

• Creditworthiness of Middlemen:

Middlemen’s credibility is an important criterion to decide on the channel. If middlemen have good reputation and creditworthiness, a company can multiply its gain and, as a result, prefers to involve them in their distribution activities. Creditworthiness is a critical aspect while offering dealership or franchise for definite area.

• Attitudes of Middlemen:

Positive attitudes of middlemen make companies to involve them in distribution activities. Companies like to select indirect channel with one or more levels. Opposite situation leads companies to select direct channels.

• Services Rendered by Middlemen:

Channel decisions depend on number and quality of services offered by middlemen to customers. When the channel members are ready to provide several services to customers, like home delivery, free repairing, credit facility, installment payment schemes, and other post-sales services, the manufacturers like to involve them in distribution to avail such services to their customers. When middlemen do not provide the useful services to customers, companies prefer direct channels.

• Financial Capacity of Middlemen:

Strong financial capacity of middlemen attracts manufacturers. This is due to the fact that strong financial position benefits both manufacturers and customers. Strong financial position results into speedy recovery of bills receivable, less chances of bad debts, immediate payment, credit facility to customers, and also advanced payment.

• Terms and Conditions:

When terms and conditions laid down by middlemen are not favourable, the manufacturers don’t like to involve them in distribution activities. They prefer direct distribution channels.

4. Factors Related to Market:

Market (consumer behaviour) is a crucial factor in channel selection.

Main factors related to market include:

• Size of Market:

In case of a large and concentrated market, it is economically affordable for a company to manage its own distribution setup. When market is small, it is advisable to assign distribution task to middlemen.

• Geographical Concentration:

When firm’s customers are highly concentrated (living in nearby area) in particular region, it can directly deal with customers by using any of the direct channels. But, when customers are scattered in several regions, it is not convenient to use direct channels. Middlemen can do better job with less costs.

• Services Expected by Market:

Number and types of services expected by the target market, and company’s capacity and readiness to meet them are important issues to be considered in this connection. For example, if the market expects a lot of services, and the company is unable and/or unwilling to satisfy them, indirect channels are preferred to avail the services from middlemen.

• Habits of Consumers:

Distribution channels must be fit with habits of consumers. Manager should find out why, how, when, where and from whom the consumers like to buy. For example, if consumers are habituated to buy a little quantity frequently from nearby retailer on credit, a company must involve retailers (along with wholesalers) to avail products at all the places where consumers reside.

• Current Market Trend:

Firm’s distribution system must be compatible with the recent market trend. Trend includes a number of variables like policies and practices of giant national and multinational companies, functioning of departmental stores and corporate retailers, cyber marketing and network marketing, business partnering with banking, insurance, and other service providers, customers’ awareness, and so on. Manager must observe these reforms and innovative practices minutely and accordingly a suitable channel should be selected.

5. Factors Related to Competition:

Current and anticipated competition affects company’s decision on marketing channel. Relevant competition-related aspects must be analyzed while selecting the channel.

Competition-related factors include:

• Intensity of Competition:

When there exists a severe competition in the market, a company must consider competitors distribution strategies and practices while selecting marketing channels. In case of less competition, a company choice will be independent of competition.

• Response and Reactions of Competitors:

Reactions and response of the close competitors must be taken into account while deciding on distribution channel. A company must select such channels that can help availing competitive advantages.

• Company’s Competitive Position in Market:

A leader company can design its own distribution network. It can select a specific channel of distribution as per its requirements. But, the follower companies have to follow market leader. Their choice depends on leader’s practice.

• Factors Related to Environment:

Marketer has to consider overall business environment while deciding on marketing channel. Domestic and global environmental forces have direct or indirect impact on company’s activities and operations.

Main environmental forces that affect channel decision include:

• Economic Condition of Country:

Country’s economic condition affects firm’s operations. In economically poor countries, short or direct channels are used to sell product at low price. In developing and developed countries, normally, indirect channels are used to distribute products.

• Phases of Trade Cycle:

Phases of trade cycle, like recession, recovery, prosperity, etc., indicate the country’s economic condition. Normally, in prosperity stage, long and indirect channels are used due to need for mass distribution and willingness of people to pay high price for the product. Direct and short channels are more suitable when the economy is passing through recession phase as direct and short channels keep the selling price low.

• Legal Provision:

Government policies and legal provisions have direct or indirect implication on firm’s distribution activities. Manager must identify relevant provisions affecting distribution activities and, accordingly, an appropriate channel(s) should be selected. Taxes, charges, administrative procedures, restrictions, and other issues are worth noted in this regard.

• Availability of Facilities:

Availability, costs, and quality necessary facilities play decisive role in channel selection. Facilities like transportation, communication, warehousing, banking, insurance, supporting government agencies at national and international level, degree of harmony among states of the country, and relations among nations at large affect firm’s channel decisions.

Many companies have secured appropriate audit provisions from their distributors. Companies have to exercise these audit clauses to maintain their credibility and commitment to risk mitigation, and should include distributors in the development of its annual audit plan. The key here is to conduct compliance and financial audits using a range of tools and strategies. A company that limits its audits to only formal, financial audits is unnecessarily restricting its audit capabilities to mitigate risks.

New and cutting-edge monitoring strategies are being developed to ensure that companies focus on high-risk distributors and flag those for follow-up inquiries and audits. With the advent of third-party management technologies, companies can free up resources to develop monitoring tools to capture and mitigate high-risk distributors.

To address distributor risks, companies rely on a mix of mitigation strategies, including comprehensive written representations and warranties; training; annual certifications; and monitoring of activities; and audit programs.

Companies have to move beyond “standard” contract provisions that have become “routine” over the last few years. Of course, a company has to secure appropriate compliance representations and warranties, and audit and termination provisions. As risk assessments and third-party strategies evolve, companies should look to tailoring additional provisions to the “specific” risk for a distributor.

Additional provisions have to be crafted for distributors’ relationships with sub-distributors, and sub-sub-distributors. Assuming that the company is only in privity with the distributor, the company has to leverage its relationship with the distributor to impose requirements on the distributor to exercise oversight responsibility of the sub and sub-sub-distributors in its distribution chain. In this area, companies should consider requiring distributors to seek company approval of a sub-distributor before engaging the sub-distributor to sell the company’s products.

This audit report focuses the distribution sales process, including: current distributor contracts and compliance with established parameters, credit memo data over a six-month period, and internal processes for validating distributors’ credit memo claims. Objectives include: evaluate internal control effectiveness/efficiency, identify areas for improvements, and provide analysis scorecard of the company’s practices against “best practices”.

The following are key observations noted during the review:

• Inventory validation counts on company inventory in distributors’ warehouses are not performed on a regular basis.
• Distributor audits have been performed in the past, but are not done on a consistent basis.
• Invalid ship-and-debit credits are being issued for invalid claims by distributors.

Ethical sales behavior, in its purest form, is making a daily, task-by-task decision to put the customer first and serve them from a heart of honesty and servanthood.

1. Your sales team puts the customers needs ahead of their own.

When salespeople focus purely on meeting their quota by any means necessary, both the salesperson and their customers lose. Potential customers pick up on unethical sales practices almost immediately, and when they do, it immediately destroys any hope creating a fruitful relationship.

Ethical salespeople don’t see their potential customers as a list of potential transactions, but as a group of people whom they might have the opportunity to listen to, understand, and guide to a solution that helps them with whatever problems their product or service can solve.

2. Your sales team builds customer relationships based on trust and reliability.

Day after day, regardless of whether a potential customer is seeking to make a purchase, ethical salespeople are always ready and willing to help customers tackle their problems and lend a helping hand however possible.

Being a consistent, reliable, and always-helpful presence is how truly fruitful sales relationships are cultivated and maintained for years, turning satisfied customers into devoted advocates for your product or service.

3. Your sales team always gives honest and knowledgeable insight to customers.

When customers ask for insight into your product or service’s capabilities, it can be tempting to for salespeople to embellish the facts in order to secure the contract or finalize a sale.

However, over time, the truth eventually does find its way to the customer, and if your sales team has exaggerated the claims of your product, you will find yourself with a customer base that is deeply dissatisfied and distrusting of anything your company has to offer now or in the future.

Simply being knowledgeable and honest about what your product or service can and cannot do is the key to securing loyal, satisfied customers who trust your company and want to recommend it to others.

4. Your sales team holds themselves accountable for problems.

When tempers flare over a missed shipment or a faulty piece of equipment, it’s easy and tempting to want to point the finger elsewhere.

While offering an excuse might diffuse some of the tension in the moment, and though it might feel like an innocent white lie, should the truth ever make its way to the customer as it often does the customer’s trust in your company is permanently damaged.

Accepting responsibility for when things go wrong, providing a truthful explanation of what went wrong, and putting in motion a plan of action to correct the mistake speaks volumes to your customers about your credibility and trustworthiness.

5. Your sales team provides customers with prompt and helpful follow-up.

Whether one of your salespeople checks in with a prospective customer to set a meeting date or they are following up with after a successful sale, prompt follow-up with a customer communicates to them that you sales rep is truly invested in their success and the level of satisfaction they have with your product or service.

6. Your sales team provides fair comparisons between your company and its competitors.

Throughout any salesperson’s career, they will naturally encounter the “Why should I choose you rather than your competitor?” question.

While it’s vital that you and your sales team believe in the products you sell, when comparisons arise, your salespeople shouldn’t seek to slander or belittle your competitors.

When those questions are encountered, simply give an honest assessment of your competitor’s offerings. Your salesperson’s honesty, product knowledge, reliability, and true understanding of the customer’s needs and expectations are what form the foundations of sales success not the slander of your competition.

There Are Eight Principles of Ethical Marketing

 The common standard of truth will be observed in all forms of marketing communication.

 Personal ethics will guide the actions of marketing professionals.

 Advertising is set apart from entertainment and news and the line is clear.

 Marketers will be transparent about who is paid to endorse their products.

 Consumers will be treated fairly, depending on who the consumer is and what the product is.

Consumer privacy will be respected and upheld at all times.

Marketers will comply with standards and regulations set by professional organizations and the government

Ethics should be discussed in all marketing decisions in an open and honest way.

Ethical marketing, for all its positivity, has its own sets of advantages and disadvantages. To make the situation even more complicated, unethical marketing is usually pretty effective. Add to that the fact that unethical behavior is not necessarily illegal behavior and it isn’t hard to see why more companies use unethical marketing, rather than the ethical alternative.

Take the case of diet pills, for example many people buy them, even though they are hardly ever effective. Why is this so? Because companies that sell diet pills exaggerate their claims and manipulate customers into buying them. If such companies advertised their products in an ethical way, they wouldn’t last very long. While their business model might make you angry, however, it’s not illegal and so they continue to sell.

If you’re looking to build a positive brand image and develop good relationships with your customers, such unethical marketing practices can lead to your downfall. Customers do not like brands that manipulate them. In order to develop trust among your customers, therefore, you should consider using ethical marketing. If your product lives up to the claims you make when you advertise it, then it will reflect positively on your whole company. The consumer will feel like you care about the value you provide them.

Of course, we can’t say that any company is completely ethical or completely unethical. Ethics is quite often neither black nor white but a sea of varying shades of gray. The boundaries shift and what is ethical today may not be ethical tomorrow. Moreover, many companies that are ethical in one part of their marketing campaign can be unethical in another, or they may be ethical in their advertising but unethical in their production processes, which is another subject altogether.

Again, consider the case of Dove soap. The company ran an ad that featured supposedly real models. The point was to encourage girls to love their bodies just as they were and not feel pressured to live up to a supermodel ideal. The problem is that ads by Dove soap before that ad, as well as ads since that ad, have focused on the same stereotypes of beauty that were being shunned then. This shows just how hard it is to always be ethical. Any company that claims to be ethical in their sales and marketing will have to make it a part of all of their advertising, not just do it once and brand themselves ethical.

A budget report is an internal report used by management to compare the estimated, budgeted projections with the actual performance number achieved during a period. In other words, a budget report is designed to compare how close the budgeted performance was to the actual performance during an accounting period.

What Does Budget Report Mean?

Since budgets are financial goals based on estimates and future projections, they are often inaccurate and can differ largely from the actual financial performance of a company. During an accounting period managers often compare the budgeted numbers that were prepared at the beginning of the period to the actual numbers they are incurring. This serves two main purposes.

Example

First, managers can correct problems occurring in the business to make the performance more inline with the financial goals in the budget. Second, they can evaluate how realistic and accurate their predictions were. If their predictions were way off during the period, they can adjust their next budget accordingly.

The budget report is used to compare both sets of data. An example budget report typically follows the same formatting as an income statement. The sales and revenues are listed first followed by the cost of goods sold, selling expenses, general and administrative expenses, other expenses, and finally a net operating income number.

There are usually two columns listed side by side for the budgeted numbers and the actual performance results for the period. Often there is a third column added to list the variances. Favorable variances occur when the actual numbers are better than the budgeted numbers. These are marked with an F in the margin.

Unfavorable variable are just the opposite. When actual numbers are worse than budgeted number, a U written in the margin identifying the poor results in that area. Depending on the operation, manager, and company these budgets can be reviewed on a monthly, weekly, or even daily basis.

A Budget Report’s Content and Sections

A company’s budget report will have different sections depending on its financial needs and the data available for the business. Common sections include:

• General income and sales information,
• The fixed and flexible expenses that are necessary for the business to operate to full potential, and
• The net worth of the entire company, including assets and liabilities.

More extensive budget reports might also include a letter from the company owner about any major financial changes in the company during the reporting period, and predictions for the future.

It’s important to recognize that there’s a difference between financial reporting and financial statements. A budget and similar financial reports are useful tools, but that’s all they are. Financial statements make more formal representations of a company’s value, and must meet specific legal and regulatory standards.

Types of Budget Reports

Budget reports or financial reports are written and created based on the needs of the business. A smaller business with a modest level of annual sales may only require a single financial year budget. However, a larger business with several hundred sales per day may need a budget report several times a year, also called quarterly reports. Keeping track of the finances and budgets makes it easier to compose the annual report for the business.

Readers and Usage of Budget Reports

The business owner and company executives are the common readers of the budget report. They use the information internally to create financial plans and projects that suit the limits of the budget in hopes of creating a larger annual profit. Growth and expansion are often the general goal with a budget report, though the opposite can be true in hard times. For example managers in departments with projected growth might hire additional staff, while others who face cuts to their operating budget might need to freeze hiring or even let staff go.

Budget reports are also read by outsiders, such as stockholders and investors. Investors and stockholders are interested in how a business is operating and doing financially before making any large decisions. It’s also a useful tool for evaluating the company’s management: If the company’s real-world results are consistently different from the budget’s projections, it reflects poorly on their decision-making and analytical skills.

Channel performance measurement is a key activity when a sales organization employs different types of channel partners. In more complex multi-channel structures, it becomes even more important due to the number of people, processes, and roles involved. The performance of a channel can be measured across multiple dimensions. The parameters that are measured usually are effectiveness, efficiency, productivity, equity and profitability of the channel.

The various channels have different purposes in the value chain; however, each task needs to support the overall corporate goals. As the number of channel partners increases, it is difficult to ensure that the channel partners are performing their specific roles as effectively as required. For example, the goal of a business might be to increase the number of strategic accounts. However, in order to gather maximum possible commission, channel partners might be engaged in getting the maximum number of accounts possible with total disregard towards prioritizing the acquisition of strategic accounts. It is therefore important to audit the channel partners and incentivize them for activities that are aligned with the corporate goals. The channel performance should also be judged on the ability to fulfill given tasks. A few carefully chosen metrics can give a good indication of the performance of each channel.

The channel performance measurement is primarily a four-step process.

Sales Objectives

The first step in channel performance measurement is to define the sales objectives for the company. These objectives are outlined and discussed in sales meetings to ensure a shared understanding between members of the marketing and sales teams.

Determine Channel Performance Metrics

Evaluating the performance of a distribution channel depends largely on the agreed upon performance metrics. Choosing the right number and type of performance metrics can help to monitor and improve the performance of channel partners. These metrics provide an understanding of how well the channel partner is doing in reaching its performance targets.

Though it is possible to evaluate a channel on hundreds of performance metrics, this would make reporting and analysis of the performance a cumbersome job. When determining channel performance metrics, a key performance driver, such as sales or units sold, should be chosen to identify and measure the most important tasks. A series of performance metrics are then decided based on the key performance driver.

Set Channel Partner Targets

After overall sales objectives are defined, it is important to assign specific targets to each of the channel partners to ensure they are in alignment with the overall objectives. Properly set targets provide a benchmark to measure channel success, monitor performance, and take corrective action to meet expectations. Each channel partner has a specific role towards fulfilling the overall sales objectives. Performance targets should be set to reflect the channel partner’s contribution to the overall objectives

Manage Channel Performance

This is the final step in channel performance measurement. It uses the agreed upon goals, assigned performance targets, and identified performance metrics to manage channel performance on an on-going basis and to identify the performance shortfalls of the channel partners. During this step, management gains an understanding of the strengths and weaknesses of each channel. Management can then take corrective action to ensure efficient performance of the channel.

The success of a channel and its efficiency are determined by the efficiency of channel intermediaries in delivering goods and services to customers and the quality of services offered in the process. Developing a comprehensive marketing plan that provides clear and concise direction about marketing activities and strategy is critical to the organization’s success.

While the Sales Audit may sound a complex term, it is actually quite simple. It is usually performed by an external auditor with both Sales and Marketing teams and analyzes the components that make up the sale.

It is very important that both Sales and Marketing teams need to be there for the audit since both divisions are closely knit and the interpersonal relationship and dependency of each division is what brings in the business.

Four Main Steps in Sales Audit

1. Manpower audit

Sales Auditor may check and scrutinize the hiring methodologies of sales reps used by the company. A complete record of the Salesperson is checked including, background, references, method of selection, salary, increase or decrease in training programs for the Sales team and any other component which may be important.

2. Market Audit

Market conditions are evaluated by the auditors to determine whether the targets given to employees are feasible or not and they are compared with market standards and industry growth rate. This helps to not only determine the feasibility of sales targets but also helps to determine early bird advantage if any for the company.

3. Sales procedures

The auditor then goes on to check Sales procedures employed by the company including the price, discounts, promotion offers, special offers and ultimately the net profit margin. This is an elaborate step and requires a detailed analysis by the auditor. The auditor compares ideal sales procedures vis-à-vis the actual procedures carried out.

4. Customer service evaluation

Since the retention of customer and repurchase of product or service solely depends on customer service and after-sales service, Sales Auditor performs a check on them. Also, a genuine customer feedback is obtained from the Customer service which can be passed on to the respective teams.

Thus, the sales audit involves detailed analysis of the sales procedure starting from the sales objectives set up till the ultimate sales done by the company’s sales staff, methods used to achieve the sales figures and viability and future of the trend if carried forward along with suggestions and improvements if any.

Tips for Sales Audit

1. Sales Objectives

 Each sale should a clearly pre-defined objective like increasing the Sales from 10% to 16% this year or increased customer acquisition.

2. Policies

The internal and external organizational policies are to be followed for the performed Sales.

3. Sales team

If the Sales team is under or overstaffed. The distribution and achievement of the target are done properly or not.

4. Sales Methods

Whether or not the methods employed to achieve Sales are within the limits of the organization and do they cross the ethical lines.

Advantages of Sales Audit

1. Maximizing profits

Effective Sales Audit will not only find loopholes but also find opportunities unexplored for the Sales of the company, thereby maximizing Sales and increasing the profit levels.

2 Budgeting

Auditing helps in Sales budgeting for the subsequent period for the organization since budgeting involves all the processes involved in Sales Audit.

3. Reputation

A Sales Audit which is effective will provide transparent data to the organization as well as the shareholders, thereby maintaining the reputation amongst the external stakeholders and also growing it consistently.

4. Capital Market

Standard audit reports are accepted by all major banks and public authorities. Thus a standardization is maintained as well as the company makes a name in the capital market for itself. The organization has to remain under the guidelines of the capital market for which the Sales Audit reports are useful.

5. Lower Capital Cost

By performing regular and timely auditing, the organization can issue clear and error-free financial statements for the public. The errors avoided today can save billions for the organization in later years thereby reducing capital cost.

6. Fraud

Sales audit can spot and stop Sales Fraud, unethical behavior selling if any and prevent tarnishing of the company’s reputation in the market.

7. Operational improvisations

Since Sales Auditors are involved in revenue generation of the company in almost every step, they can effectively guide – better than the Marketing team – to improve the operations thereby improving efficiency.

8. Business Value

Sales Auditing helps in developing the value of the business. A moderate-sized business with a moderate turnover with clear Sales audit reports will always earn value than a huge multinational with unclear Audit reports.

9. Dispute Settlement

Audit reports can always be used to settle dispute claims of past accounts. Maintenance of past accounts can be cumbersome and auditing them on urgent basis can be even more problematic. In such cases, if the company has followed the protocol of regular auditing, time and money can be saved.

10. Ethical behavior

Sales Audit reports are crucial in taxation, for shareholders, for legal bodies and for company’s own record keeping and analysis. Regular auditing can help create goodwill of the company in the market and ethical values are incorporated in employees which are carried wherever they move with them. The company is considered a benchmark for other industries.

Disadvantages of Sales Audit

1. Cost

The Sales Audit involves dealing with Sales and Marketing departments and its heads, and also sometimes with every team member to go over specific details of a particular sale. This can be tedious on account of Auditor and at times the auditor may also have to go to other departments for clarifications. This involves a lot of cost on the company’s account.

2. Staff harassment

Since numerous employees are involved in Sales Auditing, there is a chance that some of them may feel harassed and unnecessarily bothered with time and time again. This can lead to conflicts.

3. Chances of Fraud

Since the information of Audit report can make or break a company’s reputation, auditors are often made to commit fraud in reports. Internal fraud can be beneficial for the company in the short run but in long run, it can damage company reputation.

4. Manipulation

Audit reports are often based on the data presented by the company, and many times, the reports may be manipulated thus the audit reports themselves may be fake. This is a major concern of Sales Auditing.

Auditing starts at the micro level. Self-auditing as a person would improve us even at a personal level and in turn the company at the macro level. Sales Auditing would be similar to Self-auditing.

Several Methods were used to evaluate the capacity, talent and overall performance of salespersons in a company. The most common methods used to evaluate the performance are through

• Sales Target
• Sales Territory and
• Sales Report

They are discussed as below.

Evaluating Performance of Salesperson by Sales Target

The organization sets sales. Target for each salesman that he has to attain. Such targets may be set either on the basis of units to be sold or based on the value of sales. However, while setting the target it is important to consider the following points:

Several methods were used to evaluate the capacity, talent and overall performance of salespersons in a company. The most common methods used to evaluate the performance are through

• Sales Target
• Sales Territory and
• Sales Report

1. Sales Target

Evaluating Performance of Salesperson by Sales Target

The organization sets sales. target for each salesman that he has to attain. Such targets may be set either on the basis of units to be sold or based on the value of sales. However, while setting the target it is important to consider the following points:

Methods of Evaluating performance of Salesperson

• The target for sales must not be impossible to attain.
• It must be reasonable.
• It must be set taking into account the past records, market potentials, etc.
• Sales target must not be rigid.
• The incentives to be given to the salesmen shall be linked to the targets.

Advantages of fixing Sales Targets

Setting targets for the salesperson will offer the following advantages:

• Fixing sales target enables the salesman to work according to a plan.
• It provides a basis for the evaluation of the salesman’s performance.
• It is possible to coordinate production and sales.
• It does not allow any salesman to be insincere or careless.
• It enables efficient salesperson to earn more by way of incentives by attaining the target each time.

Problems in setting Sales Targets

• It is difficult to evolve a basis upon which the target may be set.
• Certain unpredictable changes in the market conditions may render the targets unrealistic.
• The same target cannot be set for all salesmen as the potentials of each person and each market differ.
• Some salesmen are capable of doing much more than the target set for them. Thus, sales targets limit the initiative.
• The target cannot be rigid. What was possible last year may not be possible this year. Therefore, the target needs to be revised periodically.

2. Sales Territory

Evaluating Performance of Salesperson by Sales Territory

A sales territory is a small segment of the entire market for a product or service. Each salesman is usually made in charge of a particular area or territory. For the trend in sales in each such area, the salesman concerned becomes accountable.

Thus, sales territory enables the business to not only evaluate the performance of the salesman but also to know the sales trend.

Advantages of Establishing Sales Territory

The advantages of establishing sales territory may be mentioned as follows:

• It enables the business to cover the entire market more effectively.
• It makes it possible for the salesman concerned to maintain good rapport with the clients in his area.
• It is possible to compare the progress in sales in each territory.
• It also gives scope to compare the performance of salesmen working for different territories.
• It avoids duplication of work by salesmen in the same area.
• It ensures proper allocation of funds for different territories.
• It also helps to have knowledge of the extent of competition in each area. A particular area, having intense competition, may require more funds for sales promotion.

Factors to be Considered in Establishing Sales Territories

• The sales territory should be so determined that it should be possible for an average salesman to cover it within the stipulated time.
• Having a particular sales territory should be profitable for the business.
• It should also give scope for the salesman to undertake any promotional campaign.
• Each salesman shall, as far as possible, be allotted not more than one territory.
• Each territory should be subject to periodical review. Additional manpower or finance may be provided depending upon the requirements.

3. Sales Report

Evaluating Performance of Salesperson by Sales Report

Salesmen are duty bound to prepare reports on the progress of their work and forward the same to their organization for necessary action. As the salesmen are the persons who know the dealers, buyers and competitors in each area, they are expected to send periodical reports to their office at regular intervals.

Contents of Sales Report

Such reports usually contain information on the names and addresses of the customers, the orders received or to be received from them, the terms of the deal, the preferences of the buyers, the action required on the order from the organization, etc.

Advantages of Sales Reports

• Sales reports enables the concern to take suitable action at the appropriate time.
• The report is an evidence of the actual work done by the salesperson.
• It helps to evaluate the performance of the salesman.
• The sales report is also an indicator of the effectiveness of the sales promotional activities of the business.
• It also indicates the trend in sales in each area and the steps to be taken to increase sales in certain places.