THE REVENUE BUDGET To break down sales revenues, most companies use com- pletely different processes than they do for selling costs. “With revenue, you allocate your annual revenue forecast using either a top-down or bottom-up approach,” the consultant says. Top-down budgeters start with a national number, then break it down by time (usually by month) and by geography (usually by territory).
BY SEASON
“Many companies first analyze the seasonality of sales in the past and assume it will continue,” the consultant says. “For instance, January sales have been 5 percent of the annual number for the year, or March sales are 10 percent of the annual number.” This approach falls short for new-product launches. “Say the annual number is $1 billion. But $100 million of that is for a new product not available until July. So you allocate $900 million seasonally over the year. Then $100 million is put in for July through December.” The timing of new-product sales can be tricky. “With a
new product, there is often a weird stock-up pattern,” the consultant explains. “You have very high sales at first, filling the distribution channel. Then sales slump to near zero. So you might have an up, then a down, then a gradual takeoff pattern.” Smart budgeters study previous launches of new products to estimate the most likely pattern. Other events also throw future sales off historical pat- terns. “Say you will expand your market – selling to a whole new customer segment – in September. So you ramp up your sales estimate for autumn.” The same adjustment is made when a competitor leaves the market and your company picks up the slack. The consultant’s general rule for breaking down sales by time: “Start with historical seasonality and recognize events you expect to change it.” One reason for looking closely at the past is that seasonality can be very important in B2B selling. “Some businesses spend their budget or lose it at the end of their fiscal years,” the consultant says. “So you get capital and large discretionary purchases toward the end of the year in these B2B markets. Others restrain discretionary spending until they see they will hit their revenue numbers for the year. If they get confident in September or October, they free up funds.”
Particular businesses have their own distinctive purchas- ing patterns. Airlines and hotel services are often needed for company conferences. “Lots of that happens in the first quarter, as their customers celebrate last year,” the consul- tant notes. And auto fleet purchases are set by model year and by the appearance of new technologies. How can you be sure your customers’ seasonal pur- chasing will repeat itself? “One likes to see three years of historical data to estimate seasonality, but it can be done well with as little as two years’ data,” the consultant says.
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“Five years’ data would be better. But a lot of companies have merged in the past five years and are not even the same companies today.”
LAY OF THE LAND For many managers and reps, the most important budget breakdown is into territories. Here, too, there are general rules – plus plenty of exceptions. The consultant advises, “For each territory, try to figure out, first, how much it represents of the nation’s potential sales and, second, how much current revenue comes from the territory. Use a combination of these two variables to allocate next year’s sales budget.”
A common method works this way: “Say you sold $900 million nationally last year, and this year’s goal is $1 bil- lion,” he says. “First, calculate actual sales and estimate market potential for each territory. Second, subtract actual from potential and get ‘untapped potential.’ Third, allocate each territory its own actual sales from last year. Fourth, allocate each territory a portion of the budgeted increase of $100 million. The portion is its share of ‘un- tapped potential.’” Again, new products are different. “For a recently- launched product, it does not matter where existing sales are,” the consultant says. “Take the whole new-product goal and allocate it in proportion to market potential.” Generally, you must understand both product mix and the market to figure the right allocation method. Further, the geographical breakdown may not be into sales ter- ritories. Revenue budgets may have to be broken down into other slices. For example, the consultant notes, “You might be allocating among states – because of regulation by states.” Insurance rates are often set by states based on the costs and revenue in each state. State taxes are another reason for a state-by-state allocation. In each case, the general approach is similar. Allocate last year’s sales plus a share of the budgeted increase in sales. Allocate the increase in proportion to untapped potential. Wide variation in the history and penetration of differ- ent markets justifies this two-step approach. “If you have a high market share in Rhode Island but only 10 percent of the market in Texas, there is not much untapped potential in Rhode Island,” the consultant points out. “So Rhode Island does not get a big allocation of the increase. But Texas, with major untapped potential, does.”
CHANNEL STRATEGIES The underlying purposes of revenue allocation – setting strategy and managing performance – often lead to non- geographical breakdowns. “You also can break down the sales goal by distribution channel or by customer,” the consultant explains. “Say a bookseller sells through a cata- log and 800 number, through its retail stores, and through its Website. You must first allocate the total sales goal
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