Setting Bonus Targets for Sales Team

This assignment content discusses the importance of a bonus system in an organization, which is highly significant as it includes performance measures such as specific, measurable, affordable, reliable, and time-bound (Bjerke & Renger, 2017). The three methods used in setting a bonus system are for achieving threshold level of sales, target level of sales, and stretched level of sales. Additionally, the assignment covers the organizational policy regarding credit agreement with customers, including credit approvals, credit limit, credit period, and credit terms and conditions.

Running Head: Finance For Sales Managers
FINANCE FOR SALES MANAGERS

Finance For Sales Managers 2
Table of Contents
TASK 1: LO1..................................................................................................................................4
AC 1.1 Calculation of gross profit margin...................................................................................4
AC 1.2 Calculation of net profit ratio..........................................................................................4
AC 1.3 Explanation on the difference between margin and mark-up..........................................5
AC 1.4 Calculation of return on capital employed (ROCE)........................................................5
TASK 2: LO2..................................................................................................................................7
AC 2.1 Identification of sales expenditure budget setting method..............................................7
AC 2.2 Establishment of information needs and source to set sales budget................................7
AC 2.3 Description of different approaches used in setting sales budget....................................7
AC 2.4 Budget frameworks.........................................................................................................8
AC 2.5 Contingency plan in relation to a budget.........................................................................8
TASK 3: LO3..................................................................................................................................9
AC 3.1 Use of budget...................................................................................................................9
AC 3.2 Budget variance...............................................................................................................9
AC 3.3 Implementation of actions to deal with budget variance...............................................10
AC 3.4 Explanation on the way of providing performance related information against sales
budget.........................................................................................................................................11
AC 3.5 Way of monitoring sales budget for identifying potential fraud or unethical practices 11
TASK 4: LO4................................................................................................................................12
AC 4.1 Need of a bonus system.................................................................................................12
AC 4.2 Selection of bonus options for members of sales team.................................................12
AC 4.3 Bonus setting methods...................................................................................................12
AC 4.4 Cost of bonus calculation..............................................................................................13

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AC 4.5 Negotiation of bonus with the members of sales team..................................................13
AC 4.6 Evaluation of effective bonus system............................................................................13
TASK 5: LO5................................................................................................................................14
AC 5.1 Organisational policy regarding credit agreement with the customers.........................14
AC 5.2 Process of granting credit..............................................................................................14
AC 5.3 Procedure of checking...................................................................................................14
Reference List:...............................................................................................................................15

Finance For Sales Managers 4
TASK 1: LO1
AC 1.1 Calculation of gross profit margin
Gross profit = Sales – Cost of Sales
= £(4.21 - 3.43) million
= £0.78 million
Gross profit margin = 100% * (Gross Profit / Revenue)
= 100% * (0.78 / 4.21)
= 18.5%
Margin of profit can never stand more than 100%. Gross profit margin always stands less
than 100% because it is a percentage of earning made by a company on its total sales revenue.
If VAT excluding selling price of a products is £75 and it is sold at a margin of 20% then
the unit cost of sales will be –
Unit cost = £75 + £ (75*20%)
= £75 + £15
= £90
 If the organisation increase sale price of the product and the mark-up remains unchanged
then the profit margin per unit as well as total will increase.
 If cost of sales increases then grosses profit earning will reduce.
AC 1.2 Calculation of net profit ratio
Gross profit achieved by SalesRUs for the year = £(560,000 – 220,000) = £340,000

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Gross profit margin (%) = 100% * £ (340,000 / 560,000)
= 60.71%
Net Profit earned by SalesRUs = £340,000 (gross profit) – (£55,000 + £20,000 + £40,000)
= £340,000 – £115,000
= £225,000
Net profit ratio (%) = 100% * (Net Profit / Revenue)
= 100% * (£225,000 / £560,000)
= 40.17%
AC 1.3 Explanation on the difference between margin and mark-up
Difference between margin and mark-up is given below in a tabular form:
Margin Mark-up
Terms used in accounting process to indicate
percentage of profit earned by a company
The rate imposed on cost price of a product or
service to set selling price of the same
Margin is the profit percentage that represents
net income
In relation to the cost of a product, mark-up is
a ratio
Margin = Sales – COGS (Cost of Goods Sold) Mark-up = 100% * (Profit /Cost price)
It depends on revenue (Hirschey, 2016) Revenue from sales depends on it
For the given scenario percentage of mark-up required to be applied by the retailer to
achieve 35% gross profit margin will be as follows –
Mark-up = 100% * (Profit / Cost price)
= 100% * (£225,000 / £3350,000)
= 67.16%

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AC 1.4 Calculation of return on capital employed (ROCE)
ROCE (%) = 100% * {Operating Profit / (Total assets – Current Liabilities)}
= 100% * {2.1 / (52 – 3)}
= 4.28%
If the interest rate of the current organisation stands for 6% then it will be an attractive
opportunity to invest in the company by the investors

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TASK 2: LO2
AC 2.1 Identification of sales expenditure budget setting method
The Percentage of Sales method is required to be used for setting sales expenditure
budget. This method is effective because in this method, sales expenditures are calculated as a
fixed % of revenue, it is simple to apply and less risky than other methods. This method could be
improved by considering the current market trend besides considering the past percentages.
AC 2.2 Establishment of information needs and source to set sales budget
The information needs for establishing sales budget could be fulfilled by unit sales
forecast data, expenses incurred as sales expenses in line with the main revenue for which those
expenses are incurred, and the time period. Sales budget is required to be established on monthly
or quarterly basis. The source from where information required for setting up sales budget for an
organisation are the sales teams who could validate revenue target along with the costs related to
sales expenditure. The source of information also includes operational departments, and
specialists of product and service those who could provide information about present and future
level of pricing
AC 2.3 Description of different approaches used in setting sales budget
The functions required to be represented at the meeting are –
 gathering sales budget related information
 decision making on the aspects of sales budget
 getting approvals from the management
 communicating the sales budget amongst the departments to help them to plan their
departmental activities accordingly
Document required to be provided at the meeting are –

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 last year’s sales budget
 expected sales expenditure data
 data about customer preference and market trend
A group meeting is required to be conducted for sharing agenda and to let the delegates to
express their view and expertise. The follow up of the group meeting is needed to be done
through routine and intranet process of communication.
AC 2.4 Budget frameworks
For developing budget framework spreadsheet is required to be used which use to
automate necessary mathematical functions, update estimated changes, and communicate the
budget. All kind of expenditure and revenue items are required to be organise logically.
AC 2.5 Contingency plan in relation to a budget
Variance against sales budget is monitored by subtracting actual spending and revenue
amount associated with each element from planned or budgeted amount of those.
The decision regarding taking the actions planed under contingency plan depends on the
degree of variance. If the variances become huge then the contingency actions are required to be
taken as soon as possible.
Benefits of contingency plan:
 helps to monitor variances
 helps in indentifying the events those could influence the budget
 assist in communication for instigating contingency actions
 restricts the changes of arising contingencies and control them

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TASK 3: LO3
AC 3.1 Use of budget
For monitoring and controlling organisation’s performance against the budget parameters
following steps are required to be taken –
 collection of required information to measure performance
 evaluation of the actual performance of an organisation against the planned or budgeted
performance of it
 communicating the progress of each organisational performance to the operational
departments to help them in undertaking required amount of corrective actions
While communicating organisational performance against sales budget it is important to
keep staffs related to operational activities such as production, sales, service, finance and
marketing. This is because all the staffs of these operational departments use to run the
operations and they need to know about what they actually done or output generated by them in
comparison to the budgeted performance (Koochakpour & Tarokh, 2017).
AC 3.2 Budget variance
Variance
Variance refers to the difference arises between budgeted amount of revenue or expense,
and actual amount of revenue or expense. A budget variance becomes favorable if actual revenue
stands higher than budgeted and actual expenses become less than budget expenses. In the given
scenario variance in relation to sales expenditure is £(8,000) i.e. £(128,000 – 120,000) which is
negative because actual expenditure exceeds the budgeted expenditure (Kaplan & Atkinson,
2015).
Percentage variance
A percentage variance denotes the proportional change in an account balance from one
period to another (the next) period which expressed as ratio. It represents the decrease or increase

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in a particular account over a certain period of time as a % of that account’s total value (de la
Torre-Ubieta et al. 2016).
Throughout a year, if the pattern of variance becomes fairly consistent then the possible
causes behind this are –
 insufficient allocation of sales expenditure
 lack of market research
 lack of control on expenditure
 unpredicted price hike of operating elements where expenses incurred
AC 3.3 Implementation of actions to deal with budget variance
Step 1
 identification of the nature and extent of variance
 evaluation of the variance by considering corrective actions
Step 2
 raising awareness amongst the relevant operational staffs or colleagues
 confirming the reason behind variance
Step 3
 agree with the appropriate actions required to be practiced for correcting the variance
 setting up timescales for each of the corrective actions to be taken
Step 4
 Review the status of corrective actions as taken for reducing the variance and their impact
(Sponem & Lambert, 2016).

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AC 3.4 Explanation on the way of providing performance related information
against sales budget
Following are some of the ways with the help of which performance related information
against sales budget could be provided –
 sending printed sales budget along with the actual sales report
 providing monthly reports through e-mails for regular update
 providing updated spreadsheet prepared as sales budget
 regular communication with the staffs of sales and expenditure department
AC 3.5 Way of monitoring sales budget for identifying potential fraud or unethical
practices
With the help of the below mentioned ways, sales budget could be monitored for
identifying potential fraud or unethical practices –
 Regular review of sales budget for assessing actual performances against the
estimated performance (asean.org, 2018)
 Preparing accurate and ethical financial reports
 Investigation of the significant deviations
 Analysisng the changes occurred in external and internal business environment
 Incorporation of every financial commitment accurately and promptly into budget
reports
 Monitor sales report and invoices for which payments made those are treated as
sales expenses on regular basis.

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TASK 4: LO4
AC 4.1 Need of a bonus system
An efficient bonus system is required for improving employee performance by increasing
their motivation to work those who are facing occupational hazards and constant challenges. This
is required for focusing on sales efforts towards profitability of the organisation and its strategic
objectives like market expansion, product development and similar. Bonus system is also needed
for retaining experienced managers for long-term (Kuvaas, Buch & Dysvik, 2018).
AC 4.2 Selection of bonus options for members of sales team
The bonus options required to be selected for the members of sale team by measuring
their individual and group performance by comparing this with KPIs, their roles and expertise in
developing relationship between organisation and customers, and the mechanism they use to
close deals. The selection of the most suitable bonus option for the staffs of sales support team
must be set by considering group performance not only the individual performance. Rewards or
bonus could be in form of cash or kind or both.
AC 4.3 Bonus setting methods
For bonus setting, the SMART option is highly significant as it includes performance
measures such as specific, measurable, affordable, reliable, and time (Bjerke & Renger, 2017).
These performance measures are essential as these are helpful for focusing on specific duties and
responsibilities of an employee, the measurability of the task they perform, affordability of
bonus, reliability of performance in present scenario and the time within which the entire task is
completed.
There are 3 methods used in setting bonus system such as –
 for achieving the threshold level of sales
 for achieving target level of sales
 for achieving stretched level of sales

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AC 4.4 Cost of bonus calculation
The calculation of bonus which is required to pay an employee depends on his/her
achievement towards meeting threshold level of sales, target level of sales, and stretched level of
sales.
AC 4.5 Negotiation of bonus with the members of sales team
For negotiating the bonus system with the members of sales team the negotiator or manager
needs to
 establish performance criteria as set previously to provide bonuses as awards
 make sure that each of the sales team member is aware of the process of applying
themselves for the awards
 ensure regarding the conditions in relation to the bonus scheme are properly explained as
well as understood by all
 explain the procedure of recording and tracking performance of employees against plan.
AC 4.6 Evaluation of effective bonus system
For evaluating effectiveness of an organisation’s bonus system the things to be measured
and evaluated are improvement or profitability or revenue, and degree of achieving KPIs by
individual employee and group of employee (Zameer et al. 2014).

Finance For Sales Managers 14
TASK 5: LO5
AC 5.1 Organisational policy regarding credit agreement with the customers
The organisational policy in relation to credit agreement with customers include –
 Credit approvals
 Credit limit
 Credit period
 Credit terms and conditions
AC 5.2 Process of granting credit
 Approval of credit process
 Checking credit references
 Approving a particular credit limit along with definite time to repay the credit
 Signing the documents consists of credit terms and conditions by the customer
AC 5.3 Procedure of checking
 Checking the bank references collected from customer’s bank account
 Trade references from suppliers use to supply to the same customer
 Credit score of the customer (Annappindi, 2014).

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Reference List:
Annappindi, S. K. (2014). U.S. Patent No. 8,799,150. Washington, DC: U.S. Patent and
Trademark Office.
Asean.org. (2018). Prepare and Monitor Budgets. Retrieved on 15th June 2018 from
https://www.asean.org/storage/images/2013/economic/matm/Toolboxes%20for%20Six
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TM_Prepare_&_monitor_budgets_310812.pdf
Bjerke, M. B., & Renger, R. (2017). Being smart about writing SMART objectives. Evaluation
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de la Torre-Ubieta, L., Won, H., Stein, J. L., & Geschwind, D. H. (2016). Advancing the
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Hirschey, M. (2016). Managerial economics. Cengage Learning.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
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Kuvaas, B., Buch, R., & Dysvik, A. (2018, July). Individual variable pay for performance,
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Sponem, S., & Lambert, C. (2016). Exploring differences in budget characteristics, roles and
satisfaction: A configurational approach. Management Accounting Research, 30, 47-61.
Zameer, H., Ali, S., Nisar, W., & Amir, M. (2014). The impact of the motivation on the
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