Table of contents
Sales commission expense forecasting is a critical part of the budgeting process for finance teams. As essential as it is for fiscal responsibility, it’s also a challenge for many businesses.
How can business executives accurately predict future spending with such a variable expense? The answer lies in leveraging automated tools and platforms like Adaptive Planning.
Why Is Sales Commission Forecasting Important?
Sales commission forecasting is important for many reasons, the most notable being that it allows business leaders to visualize the impacts of their commission structure on overall revenue and growth. When done right, sales commission forecasting helps executives make accurate, data-driven decisions that, in turn, drive results.
In addition to fostering much-needed collaboration between finance, sales, and operations teams, sales commission forecasting helps companies build effective compensation plans and create the trust and transparency needed to motivate sales reps to meet company goals.
Even with so many benefits, companies continue to face challenges in predicting sales commission expenses.
For one thing, compensation is a function of sales, which makes it a variable line item that can frustrate forecasters. Additionally, data silos created by using individual spreadsheets means companies must figure out how to unlock business intelligence and insights from several applications, including CRMs and ERPs.
Without a central source of truth containing real-time updates, finance teams will likely be working with outdated and untrustworthy data and risk making poor decisions as a result. Data silos make continuous sales planning nearly impossible, which means it’s hard to adapt to business or market shifts.
Understanding Sales Commission Expenses
Sales commissions refer to the compensation given to sales professionals in exchange for persuading customers to make purchases. Many business owners wonder: is sales commission an operating expense or part of the cost of goods sold or held in inventory?
The answer is that sales commissions are operating expenses presented on the income statement under selling, general, and administrative (SG&A) expenses.
The Significance of Accurate Commission Expense Forecasting
Sales commissions are based on revenue, which is every company’s largest variable.
Costs are always changing as the business changes and grows. Accurate commission expense forecasting enables financial teams to make data-driven budgeting decisions in the face of ever-changing numbers so revenue can be spent wisely.
Knowing sales commission expenses in advance aligns sales goals with expense management by letting the sales team know what targets they need to hit. It also builds transparency with the entire team, as leaders can give sales reps an accurate number and show how the team arrived there.
This sense of transparency is vital for team morale and productivity.
Building a Foundation: Data Sources for Commission Expense Forecasting
Teams can use numerous data sources for commission expense forecasting, including robust CRM data providing critical information about the sales pipeline and active accounts.
Companies can also integrate revenue and personnel models, which determine how many salespeople are employed, what titles and compensation packages they’ve earned, and how much a company will spend on commissions as a result.
Any chosen source must provide clean, accurate data. Because data is the foundation of every good decision-making process, working with data that isn’t clean and up-to-date makes accurate decision-making nearly impossible.
Creating Commission Models With Assumptions
An assumption is any circumstance that can affect your commission forecasting, and there are several that have the power to influence commission decisions.
The first is the salesperson’s title. Higher-level titles like account manager or senior sales analyst will likely receive a higher base salary or commission than an entry-level sales rep or sales assistant.
Commission expenses can be influenced by commission structures as well. For example, companies using a tiered structure will pay out more in commissions to successful sales reps, while a territory volume structure means that field sales reps will split their commission as long as they all meet their sales quotas.
Finally, historical performance data can also influence commission expenses. Many companies base their commission plan scenarios on past performance numbers, predicting what might happen in the future by looking at what’s already occurred in the past.
Because multiple factors can impact how much a company spends on sales commission expenses, accurate forecasting requires customizing assumptions so you can see the impact of each on your potential budget and confirm commission plan design budgets with ease.
Steps in Sales Commission Expense Forecasting
The process of forecasting sales commission expenses includes four critical steps:
- Data Collection and Preprocessing: Make sure you have the most accurate and up-to-date data from all sources
- Developing Commission Expense Models: Create and compare multiple what-if models that reflect historical data and future goals
- Testing and Validation: Test models against different what-if scenarios and assumptions to see the potential impact on profitability and health
- Incorporating CRM Data: Allow pipeline data to shape and inform decision-making
While it’s possible to complete these steps manually, using automation to forecast sales commission expenses ensures greater accuracy and a reduction in lost opportunities.
Leveraging Adaptive Planning for Accurate Forecasts
Accurately forecasting sales commission expenses is a necessity for all stakeholders. Fortunately, Adaptive Planning can help businesses solve the challenges they face in getting it right.
Benefits of Using Adaptive Planning Software
Adaptive Planning software offers businesses the following benefits:
- Enhanced Data Integration: Teams can pull accurate data from CRMs and other tools into a central location for greater productivity and enhanced insights
- Real-Time Updates: No team has to wait for a spreadsheet in their inbox, as all the necessary information is at everyone’s fingertips
- Scenario Modeling: Use what-if scenarios to see the potential impact of decisions before they’re made
- Advanced Analytics: Gain in-depth insight for better data-driven decisions
- Collaboration and Accessibility: A single source of truth ensures that everyone has access to the same data and can remain on the same page
Together, these benefits can help businesses streamline their forecasting and take control of their budgeting process.
How to Implement Adaptive Planning for Commission Expense Forecasting
Implementing Adaptive Planning requires only a few simple steps:
- Data Integration: Connect CRMs, ERPs, and other applications for accurate data collection
- Configuration: Ensure that all spreadsheets accurately reflect assumptions
- Assumption Management: Monitor changing circumstances that could affect sales and modify formulas accordingly
- Continuous Monitoring: Check sales and commissions against allotted budgets and adjust forecasting as needed
While the process will require a little effort, the advantages it promises are well worth it.
Monitoring and Adjusting Commission Expense Forecasts
Accurate forecasting is never finished. Because sales are dynamic, commissions follow suit. Adaptive Planning allows for continuous revenue and sales data monitoring so teams can implement best practices for reconciling sales commissions and revenue recognition.
Continuous monitoring also helps business executives identify and analyze deviations from forecasted expenses. This, in turn, leads to reduced budget variance and the ability to make better, more informed decisions about resource allocation.
Streamlining the Sales Commission Expense Forecasting Process
Forecasting sales commission expense is critical for accurate, timely, and data-driven budgeting. It also fosters seamless collaboration between finance, operations, and sales teams and allows business leaders to realize the impact of compensation plans before they’re rolled out.
Adaptive Planning streamlines and facilitates this all-important process by automating it, which improves data management and ensures close alignment between revenue and commission.
The team at QBIX Analytics can help you leverage Adaptive Planning to regain control of your financial planning and make the undertaking more efficient and accurate. With the help of Adaptive Planning, you’ll be able to maximize your budget and make smarter decisions more quickly.
Contact us today to learn more about integrating Adaptive Planning into your forecasting process so you can start making better decisions and optimize your sales commission structure.
FAQs
Because sales are variable, sales commission expenses tend to ebb and flow with sales volume and performance. This variability, along with incomplete data and constantly shifting business dynamics, makes forecasting difficult for most business leaders.
Commission expense forecasting gives finance teams an accurate view of what they’ll be spending in the future.
Because commission expenses are some of the most costly line items on the ledger and frequently change each quarter, forecasting aids in developing realistic budgets and reduces budget variance, the difference between allocated resources and what’s actually spent.
Adaptive Planning streamlines commission expense forecasting by introducing automation to the process.
The platform is built on a robust data integration engine that pulls clean, accurate, and real-time data from a number of sources. With what-if scenario modeling, finance teams can see the impact of a particular plan prior to implementation. These features enhance efficiency and accuracy, allowing for improved sales commission expense management.
If you’re wondering, “Is commission on sales an expense,” you aren’t alone. Sales commission is indeed a variable operating expense for your organization. It has a direct correlation to sales performance and revenue generation. It isn’t a fixed expense and can be challenging to predict, especially without a solid forecasting process in place.
In order to employ effective budgeting techniques, business leaders need to be able to accurately forecast expenses, including variable ones like sales commissions. This type of forecasting allows businesses to do everything from setting sales targets to creating commission structures that attract and retain salespeople.