The sales and marketing expense is included in the financial projections as part of operating expenses in the income statement. It is important to realize that the expense is a direct result of the planned activities in the marketing plan section of the business plan.
Sales and Marketing Cost Drivers
All expenses are driven by activities, and in the case of sales and marketing the key cost drivers include the following:
- Staff expenses
- Sales commissions
- Customer acquisition costs
- Brand building
- Technical support
- Customer service
Typical Sales and Marketing Expenses
It is important to decide from day one what will be classified as a sales and marketing expense. There are a wide variety of expenses to consider, but unfortunately not all business classify them in the same way. For example, some businesses might classify technical support as a sales expense, whereas others may include the cost as part of their cost of sales.
The following are typical sales and marketing costs:
- Sales and marketing salaries (sales manager, marketing manager)
- Customer service salaries
- Travel and entertainment relating to sales and marketing
- Public relations
- Trade shows
- Market research
- Product demonstrations
- Packaging and distribution expenses
- Commissions and fees to sales agents
- Selling show room and sales office costs
- Post sales technical support
Sales and Marketing Expense Ratio
Additionally having classified the sales and marketing expenses, it is useful to calculate the sale and marketing expense as a percent of revenue to give a financial ratio as follows:
As can be seen this ratio is one of many expense ratios, and can be used to make comparisons to other businesses within your industry (providing they are using a similar classification), to ensure that the sales and marketing cost included in the financial projections is comparable and realistic.
In addition, it is important to monitor changes in the ratio over time to see that the investment in sales and marketing is producing the required and planned result. A significant rise in the sales and marketing expense to revenue ratio may indicate that the investment in sales and marketing is not as cost effective as it should be.
Having a well-defined sales and marketing plan with realistic expenses is crucial to attracting investors and lenders, as well as setting the business on a path to sustainable growth. Furthermore it’s important to review and adjust the sales and marketing expenses regularly to ensure that the business is spending its resources effectively and efficiently.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.