article | July 20, 2011
Carryover Sales Impact on Resource Planning – Preparing for 2012 Plan
Cuts in the sales field two years ago may have improved the bottom line at the time, but if your company has a high degree of carryover sales as a normal course of business, then the negative impact may just now be starting to come to fruition. Even the best go to market strategy will come up short when faced with insufficient sellling hours to meet your objectives. Attention to resource planning for your sales force sizing is a must as you enter 2012 to make sure your have the sales activities to support your sales goals.
Conversely, the addition of reps will have an immediate negative impact through the ramp-up period and onto their break-even point. Including the concept of carryover sales to your decision about whether to add new reps provides you an added dimension for your evaluation of resource planning.
Salesforces involved in selling complex solutions or specialized products find a level of carryover sales from year-over-year continued renewals and repurchase. The degree of recurring revenue (or carryover) impacts the determination on sales force sizing. The role that recurring revenue plays in the sales organization is instrumental in determining whether to add more sales heads. The Carryover Chart is extracted from a methodology used by Sales Benchmark Index to perform resource planning and provides a valuable pulse-check of whether a sales force may be too small, too large, or the right size.
Carryover sales are the reoccurring sales that continue to arrive based on past sales efforts. This is most common in cases where a complex product or service solution is in place with a client after a costly and time consuming implementation where the client has a large switching cost and once they have the solution in place they continue to renew with minimum sales effort. This has the potential of significantly exaggerating the effectiveness of the representatives from your past resource planning.
Evaluating your sales force resource planning requires a series of data inputs and the result is a detailed understanding as to whether and how much new sales staff is warranted with respect to carryover.
I. Estimate the annual cost of a sales person
a. Calculate total average annual sales person compensation including salary and bonus
b. Determine value of benefits as a percentage of total compensation
c. Determine Administrative and field support costs as a % of total compensation
d. Determine annual T&E, auto, phone, laptop costs for the sales people
e. Establish the total cost of a sales person by summing costs from points (1-4) and adjusting for number of sales people
Total Salary and Incentive pay of average sales rep: $170,000
Benefits value as a % of total compensation (20%): $ 30,000
Administrative and Field Support costs (10%): $ 15,000
Annual T&E, auto, phone, laptop costs: $ 30,000
Total annual cost of a sales person $245,000
II. Estimate the gross contribution margin
a. Determine variable product costs (all costs that vary with how much product is sold)
b. Determine total annual sales
c. Subtract variable product costs from total sales to establish the gross contribution
d. Divide gross contribution by total sales to determine gross contribution margin
Variable Product Costs = $9.0M
Total Annual Sales = $27M
Gross Contribution = $18M
Gross Contribution Rate = $18M/$27M = 67%
III. Calculate break-even sales
a. Divide the cost of a sales person by the contribution margin rate
$245,000 cost of a sales person divided by 67% contribution margin rate = $365,671.60
IV. Calculate average annual sales per sales person
a. Divide total annual sales by total number of sales people
Number of Sales People = 10
Total Annual Sales = $27M
$27M annual sales divided by 10 sales people = $2.7M
V. Compare break-even sales with the average sales per sales person. Compute the Average Sales/Break-even Sales Ratio.
a. Divide average annual sales per sales person by the break-even sales amount
Average annual per sales person = $2.7M
Break-even sales amount = $365,671.60
Average Sales / Break-even Sales Ratio for a sales person is $2.7M divided by $365,671.50 = 7.38
VI. Identify the Carryover Rate.
a. Estimated the percentage of continued sales renewals/reorders that will occur without additional sales rep effort.
VII. Carryover table evaluation.
a. Review the Carryover table below to identify the indicator of sales force size for your resource planning.
In this case, a sales person generates gross margin of 7.38 times their annual costs to the company. Use the table to compare the ratio with a particular level of sales carryover and see that in this example the sales force may be too small.
The carryover impact provides one insight that when included with a series of resource planning tests can provide you with reliable answers for sales force sizing. In summary, the carryover method provides your resource planning efforts a valuable indicator determining whether to add or reduce headcount to operate at optimum efficiency to meet your revenue goals.
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