The course of managerial accounting dedicates up to two chapters on the subject of budgeting. One of those chapters goes into the process of preparing budgets in manufacturing, retail, and service companies. This chapter goes into the process of preparing budgets for sales, cost of goods sold, selling and administrative expenses, cash receipts, and cash disbursements. Going into these types of budgets may be helpful for students but I don’t want this article to be a repeat of what appears in textbooks. I want this article to focus on the process of financial planning and how it can be used in your company’s selling function.
The Process of Financial Planning
The process of financial planning is described by the following illustration:
The process illustrated above is described in greater detail through three articles I wrote for FP&A Trends:
- Using Economics in your Financial Plans
- Using Accounting in your Financial Plans
- Using Finance in your Financial Plans.
The choices people in your company’s selling function make are centered in two areas, promotion and distribution.
Promotion is about persuasion. Persuasion comes into play when companies want to acquire new customers and retain existing customers. Acquisition and retention can occur from a number of diverse forms.
Diversity in form exists in content like
- Print Ads
Diversity in form also exists in media like
- Social Networking
- Video Sharing
The examples of content and media are just that...examples. People responsible for promotion in your company can identify additional forms for the purpose of acquiring new customers and retaining existing customers. The additional forms can make promotion challenging however the challenge can be managed. How the challenge can be managed is through financial planning. Financial planning, as a process of thinking, can engage people to think about the combination of content and media best suited for the company to acquire new customers and retain existing customers.
Distribution is about supply. Companies supply products or services in order to improve the well-being of customers. In order to improve the well-being of customer’s people in your company’s selling function need to make choices about how your company’s products or services will be made available.
Companies can make their products available through
- Stores owned or leased by themselves and other companies.
- Outlets owned or leased by themselves and other companies.
- Warehouses owned or leased by themselves.
- Websites managed by themselves.
- Online retailers.
Companies can make their services available through
- Offices owned or rented by themselves.
- Facilities owned or rented by their clients.
One can see the role of technology in making products or services available. Technology has allowed, is allowing, and will allow companies with an alternative to the “brick and mortar” approach to supply. Having this alternative gives companies even more choices to distribute what they sell and one point must be made about this alternative: what I provided as examples are not set in cement. New technologies, whether hardware or software, can emerge in a way that gives companies even more choice in how they distribute what they sell. How people in your company’s selling function can manage the process of choosing the best method of distribution can occur through financial planning, i.e. think about how the company’s products or services can be distributed in a way that provides the best opportunity for accumulating wealth.
Like choices transactions will occur in both areas of selling, promotion and distribution.
Perhaps the most recognized transaction in promotion is the payment for advertising in media like newspapers, radio, and television. Its recognition is due to the long-standing presence of these types of media but like many things change occurs and promotion is no exception. The internet has been the driver of this change. Platforms like websites and social networking have changed how companies promote what they sell. The change to these platforms does not generate the transactions most commonly associated with ads. The change has generated a transaction not easily seen on financial statements. That transaction is the compensation of people for their time adding content to these platforms.
After the choice is made to use platforms like websites and social networking the use of financial planning should go into greater detail. The greater detail begins with expenses associated with employees, salaries and wages, and consultants, professional services. The use of financial planning in your company’s selling function should go into greater detail by identifying the activities that comprise these expenses and the activities should be classified in terms of
- What people are doing
- How people are doing what they are doing
- Why people are doing what they are doing
- How much time are people doing what they are doing
- Where are people directing their time to what they are doing
Classifying activities in the above-listed terms can help people in your company’s selling function understand the basis for cash disbursements. Understanding the basis for cash disbursements provides an opportunity for further understanding. The opportunity for further understanding is to learn about cash receipts from customers. Acquiring this form of further understanding can help people in your company’s selling function connect the transactions from their choices to the wealth they want their companies to accumulate.
Perhaps the most recognized transaction in distribution is the payment to carriers for transporting products. Companies record these payments under the category of selling expenses but financial planning can engage people in your company’s selling function to think about one more transaction. The transaction is to record the reimbursement of these payments from customers. How your company can record reimbursement is through shipping terms fob shipping point which means your customers take ownership when your company puts products on the carriers at your shipping docks. This transaction should be part of financial planning because it raises a concern which is whether customers will be upset about paying the freight. If they become upset, they may no longer be your company’s customers. This is an example of how to use financial planning in your company’s selling function because the concern affects revenues as well as expenses.
Like promotion websites and social networking have changed distribution, most notably in services. Services can be provided through technology instead of facilities. Providing services through technology can be addressed like promotion by people in your company’s selling function going into greater detail through the terms listed earlier. Going into greater detail in distribution, like promotion, can help people in your company’s selling function understand the nature of cash disbursements and learn about cash receipts from customers. Understanding and learning represent the connection from the choices made about distribution to the wealth that this element accumulates.
Whether the engagement is a promotion or a distribution of your company’s selling function acquires wealth in the form of an intangible asset called a customer list. A customer list may not be thought of as an asset however it is a powerful resource. Its power comes from its ability to confirm the value proposition that your company projects. Confirmation of your company’s value proposition is very important because the value proposition is a way for your company to achieve financial health through profitability, liquidity, and solvency. Being healthy through all three areas indicates a strong bond between your company and your customers. Having this bond does not come from nowhere, having this bond comes from the ability of your company’s selling function to supply what customers want and persuade people to become or remain customers. The strength of this bond can be found within the contents of your company’s customer list.
The purposes of a selling function are to promote and distribute what a company sells. Promoting and distributing what a company sells goes beyond products. Promoting and distributing what a company sells comprises the characteristics of products or services. The characteristics of products or services exist in how companies supply these items. In order to organize these characteristics, it is necessary to use financial planning in your company’s selling function.