Budgeting for Success - Creating After Sales Income Budgets That Create Value
How do you budget After-Sales?
Planning the income budget of spare-parts sales is one of the most important tasks of distribution management.
While the after-sales income budget is usually substatntially lower in revenue terms than the vehicle sales budget, the profitability is often many times higher causing the contribution to gross margin to be very important to the distributor bottom line.
By planning a proper budget, businesses can plan for cash-flow, investments in infrastructure and monitor the achievement of the budget throughout the year. More importantly, the budgetary cycle offers a real opportunity to change direction towards emerging profit opportunities and plan for improved results. In this article we will explore this opportunity in detail.
So how do most distributors budget after-sales today?
They take the historic rate of-change for the past 3 years and forecaste the same for next year.
More sophisticated distributors attempt to ground this forecast in next-year plans by tying the rate of change to the expected rate of change in vehicle sales only to find this is a poor indicator of after-sales.
The problems in traditional budgeting
While the simplicity of this method is admirable, it has several important drawbacks:
 Ignoring profit opportunities and the potential sales and budgeting only against previous years creates stagnation. Managers need opportunity and potential to motivate action and produce results.
If resources are required to achieve profit opportunities, they would be hard to justify based upon a traditional budget. Management would find it illogical to commit resources to achieve growth that seems to be coming from inertia only. "If you managed to achieve a growth of 5% without an additional sales-person. Why do we need another salesperson?" The flip-side of this case ofcourse, is that approving marketing programs without understanding the profit opportunities surrounding them is a very risky business as the following case-study demonstrates:
A Distributor of a Premium Brand had a Bi-polar customer base:
• 10K Premium passenger cars
• 20K Commercial vehicles
The Main after-sale marketing plan for 2007 was designed to be a "Frequent flyer" type customer loyalty program rewarding 1st hand loyal customers from the passenger car market for entering the workshops
Let us examine the same decision with this distributors actual profit opportunities:
Notice that the program the distributor is planning is actually targeting the segments -of least opportunity. And achieving these last 7-11% will probably be a lot harder gaining 10 percentage points in any other segment.
• Difficulty to perform a Gap-Analysis during budget control sessions. A business that wishes to review performance against the budget periodically would be hard pressed to figure out the causes for discrefrencies. Basic breakdown into "Price deviation" and "Quanitity deviation" is harder to achieve in spare-parts as the quantity of spare parts sold has no real meaning (Selling 12000 bolts is equivalent to selling 1 Engine)
Keys to effective Budgeting
The annual budgeting cycle is an opportunity for businesses to stop and take-stock of the opportunities in their market. An effective budgeting cycle should work by the following logic:
This logic-based method ensures businesses systematically consider all opportunities, leaving the slogans and wishful thinking behind and focusing on planning for achievement of realistic goals.
In addition to following the logic presented here, there should be substantial IT and data support available for the process to create a full picture of opportunities and decision impacts.
Summary
Commiting your organization to a structured budgeting process for the after-sales can be a great tool to open up opportunities and motivate towards achievable goals.
However, there are many pot-holes along the way and organizations need to take care not to get drowned by the process. Make sure you have proper support for this change in terms of change-management, information and tools.
Basing your actions on profit opportunities, forcing logic into budgeting and setting realistic goals backed with concrete action plans are key issues to success in this business. Don't miss out on your opportunities.
Examples For Budjeting and Performance Control by A.P.M. Solution
Budget BI Tool
Budget Control BI Tool
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