What are Selling Expenses?
Selling is one of the, if not the most essential functions in any business. Sales bring in revenue for companies to function and grow. The selling processes help build customer loyalty and trust for a brand. Naturally, it makes sense for businesses to allocate a significant part of their funds to the departments that facilitate sales.
Selling expenses are diverse, numerous and use up most of a company’s resources. If not managed judiciously, they can cause budget leakages and cause salvageable savings losses. Hence, the company’s finance leaders must devise a strict expense management strategy and optimise selling expense budgets.
Read more – Different Types of Expenses
What is the Difference Between Selling Expenses and Cost of Goods Sold (COGS)?
Selling expenses are the costs that facilitate the final sale of a product or service. They can include distribution costs, marketing expenses, and selling costs. These are the costs associated with generating awareness, facilitating deliveries, getting orders etc.
The cost of goods sold or COGS are the costs associated with the procurement, creation and development of the goods and services. For example, for an apparel company, the cost of fabric for a dress will be included in the COGS, whereas the cost of advertising the dress in a magazine will be included as a selling expense.
Types of Selling Expenses
Creating a product or delivering a service is hard, but selling that product or service is even more challenging. It takes research, analysis, lead generation, lead nurturing, content development, content marketing, sales pitches, door-knocking, distribution strategies, workforce and much more to meet that first sales target.
The final sale of any product or service is the culmination of multiple business functions, including marketing, distribution and selling. These functions can be further divided into different niches.
Distribution cost is the sum of money used to place a finished product in the hands of the consumer. These costs generally include logistical expenses, shipping, packaging, handling, freight, storage and insurance costs. Distribution costs may also include the salaries of the employees involved in the distribution process and the fees of the shipping partners, third-party vendors etc.
Marketing is the process by which businesses improve awareness, public favour, purchase preference etc., about an offering. There are various costs associated with marketing like advertising costs, content creation, marketing personnel salaries, sponsorship, cost of conducting events, marketing technology, social media, website maintenance, merchandising, public relations, design, branding and development etc.
Selling processes are the final activities performed by salespeople to close a deal with a customer. The costs involved in selling a product include salesperson salaries and wages, commissions, taxes, benefits, showroom rents, travel expenses, discounts etc.
Read more – Operating Expenses
Why should you Calculate and Analyse Selling Expenses?
1. Optimisation of resources
Sales and sales-supporting activities use up a considerable amount of company resources. Calculating this expense is the first step to understanding the ROI value of these activities. A close analysis of selling expenses can also tell you which specific activities or departments yield the highest results and eventually help you optimise your spending to focus on areas with the highest ROI.
2. Reducing tax burden
Calculating selling expenses can help you track the spending category-wise. The data collected during expense evaluation eventually enables better tax policy compliance and allows the finance team to calculate the final deductions that reduce the tax burden.
3. Cost reduction
Selling expense analysis can help develop crucial KPIs like customer acquisition cost (CAC) and lifetime value. This knowledge eventually helps the executives make the right decisions about cost optimisation by telling them exactly which functions need a boost and which ones need to change.
4. Overview of the sales and marketing teams’ operating condition
Expense analysis gives a direct insight into the performance of the organisations’ selling activities. Return on specific expenses can help you quantify the performance of your marketing and sales teams and help you make more informed personnel decisions.
Read more – Non-Operating Expenses
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How to Calculate Selling Expenses?
Step 1: Identification of spendings
Study the general ledger and identify all the selling expenses that your organisation incurs. These expenses can differ from company to company. Ensure you list costs directly involved with sales for the final calculation to prevent overstating, as that might distort the final spend to returns ratio. Do your best to avoid estimations and try to work with the concrete data at hand.
Step 2: Categorisation of expenses
Categorise the selling expenses in two sections: fixed and variable. Fixed expenses include costs that do not change with the number of sales, for example, the office rent, the basic salaries of the employees etc. Variable expenses are the costs that depend on the number of sales made. The commission per sale is the most considerable variable expense you need to consider.
Step 3: Adding up the expenses
Retrieve the fixed and variable expenses data for each quarter. Add up all the costs to get the final figure.
Step 4: Calculating the sales revenue
Add up the sales revenue for all the quarters of the year to get annual earnings. You can compare the two data points to calculate the ROI for your selling expenses.
Read more – Business Guide to Capital Expenses
Calculate Selling Expenses with an Expense Management Platform
The calculation of selling expenses is a simple task. However, it takes utmost diligence to ensure that all the data is accurate. Even the slightest error in data input can cause a ripple effect and compromise the final analyses. That is why it is wise to do away with manual processes and use an expense management platform to record, track, calculate and analyse expenses.
Spend management systems record accurate information and centralise the data. They also offer real-time automated tracking and prevent the need for manual inputs that often contaminate data. Add innovative custom analytics and insights tools to this package, and you have an intelligent digital sidekick that will solve all your expense management problems.