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Management advisory services: controlling SG&A costs.

The "80-20 Rule" in its various formulations (e.g., 80% of the revenue is generated by 20% of the products, 80% of service costs are incurred for 20% of the customers) is rarely ever exactly true but it does contain an important principle about control. The 80-20 Rule admonishes us to stress the significant when designing control reports. While this principle may seem obvious, it is frequently ignored. Many companies' routine control reports stress the insignificant while the significant goes unreported to management.

For example, recent studies of manufacturing firms have concluded that 65% of the control effort is directed toward direct labor cost while this cost represents less than 10% of manufacturing costs.(1) In the category of unreported information, Peters and Waterman asked many companies who their top 50 customers were and found that most companies cannot answer the question.(2)

Clearly, this situation provides an opportunity for management advisory services. First, existing control reports can be reviewed with an eye toward eliminating those that don't focus management attention on significant costs. Why incur the expense of generating unnecessary reports? Second, new control reports need to be designed for significant operating costs that are escaping detailed management scrutiny. We will focus on this second opportunity.

The operating cost category of greatest current concern is the explosive growth in selling, general and administrative (SG&A) costs. At IBM, SG&A costs have risen from 35% to 42% of sales dollars in just the last 6 years.(3) The recent problems of Sears Roebuck & Company are partially attributed to SG&A costs that are 30% of sales dollars which compares unfavorably to its successful competitor, Wal-Mart's 18% of sales dollars.(4) Further, Dudick reports that SG&A costs have grown to the point that they exceed 50% of manufacturing costs for most companies and may approach 100% in some industries.(5)

With this increasing significance of SG&A costs, one would expect that accountants would be heeding the 80-20 rule and devising control reports to focus management attention on this area of growing concern. Unfortunately, this does not appear to be the case. Dudick also reports that most firms continue to allocate SG&A costs to products using a percentage of sales dollars method.(6) Two questions will assist in demonstrating that allocating SG&A costs by sales dollars does not provide any insight into controlling these costs:

1. Is the use of sales resources (sales effort) proportional to the price of products?

2. Are product warranty costs proportional to the price of products?

Clearly, the answer to both of these questions is no, for most firms. Sales resources and warranty costs are more related to a specific product's sales effort and warranty experience than to the product's price.

Before getting into the details of the control of SG&A costs, it will be helpful to differentiate two levels of control. First, there is strategic control which is exercised by top management who is concerned with decisions that involve the allocation of corporate resources. One control report that assists top management with strategic control decisions is a product profitability analysis that reflects the proper allocation of SG&A costs. This report assists top management with such strategic questions as which products to discontinue and which products to commit additional resources to. Second, there is operational control which is exerted by middle managers over the resources that they have been allocated by top management. Operational control reports are concerned with the day-to-day monitoring of the efficient and effective use of particular resources by middle managers. For example, once a sales manager has been assigned a particular number of sales personnel and a sales support budget, that manager must efficiently and effectively use these resources to achieve the sales targets that have been assigned.

Strategic Control

It has been well documented that the product profitability analysis prepared for top management for strategic control decisions is often misleading. For example, Dudick discusses a company whose lighting product group reported a 22% profit margin (the company's highest) when its actual profit margin was 14% (only fourth of seven groups).(7) Cooper and Kaplan discuss a company whose original equipment product line reported an anemic 2% profit margin when the actual profit margin was a solid 9% and competitive with other lines.(8)

A major cause of these incorrect product profitability analyses is the inappropriate allocation of SG&A costs using sales dollars as described earlier in this paper. Since activity based costing has been offered as a solution to this problem elsewhere, we will not pursue this topic.(9) Instead, we will focus on operational control and the contribution accounting control reports can make there.

Operational Control

No single control report will provide day-to-day or operational control over all SG&A costs. The first step, then is to identify the most significant SG&A costs and design a control report for them. In many companies the most significant SG&A costs are selling costs. Indeed, in some service industries such as insurance and real estate selling costs constitute most, if not all, of the SG&A costs. Consequently, we will focus our attention on the control of selling costs.

There are both direct and indirect selling costs. Direct selling costs are costs associated with the field salesperson. Such costs would embrace wages/salaries/commissions, travel, entertainment, the cost of samples, displays and demonstrations. Indirect selling costs, often labeled as marketing costs, would include promotional expenses and sales support. This latter item would include such things as clerical support, reprographic support and customer service hot lines via 800-numbers. These indirect costs are part of making sales and keeping customers.

Selling costs can quickly get out of line because a few individuals go awry. The sales manager's dilemma is to find the culprits and make the needed corrections without disrupting the people who are okay.

The tool necessary to assist the sales manager in controlling these selling costs is portfolio analysis. As academic and ominous as this sounds it really amounts to thinking of salespeople as assets, like those in a stock portfolio. Some salespeople are good solid cash generators; not high fliers but dependable low risk investments. Some salespeople are stars; they come through with the best sales, are leaders, innovative and outstanding. Some salespeople are dogs; they are more trouble than they are worth with costs out of line, low sales and just a general source of managerial headaches. And some salespeople are "problem children," not really bad, just in need of a lot of guidance. They will eventually turn out okay, but along the way they need close attention.

The trick in portfolio analysis is to identify who fits into which category so the manager can take appropriate action. To do this, sales managers can manage their portfolio of sales personnel with ratios just as money managers use ratios in decisions about their portfolio of stocks.

Gathering Data

The data for a control report of key ratios to manage a salesforce is readily available. A sample of the necessary information and its source is described in Table 1.

To help describe the sales cost control report and illustrate its interpretation, we will use an example. Suppose there are five salespeople reporting to a particular sales manager. These five sales people and their results for a particular month are reported in Table 2.

Though the example is simple, it is evident that with a larger salesforce the job of determining who is a good (bad) performer could become a daunting exercise. A sales manager must have a systematic report which allows her/him to focus on just the information necessary to answering his/her managerial questions. Calculation of certain key ratios and the application of portfolio analysis will accomplish this.

Preparing the Report

The raw data from Table 2 was converted into the control report in Table 3 containing certain key ratios which will assist the sales manager in identifying the stars as well as the problems. Note also that the control report in Table 3 indicates the average for each ratio to assist in identifying those salespeople whose performance varies substantially. Including the average allows for quick intragroup comparisons. Another row could have been added for "control targets" so that deviations above or below target could have been easily identified. If, for example, the target sales per call (S/C) was $500, we would immediately see the whole group is about 20% below target. However, just as quickly Don and Cate are apparently the two most responsible for the whole unit's poor showing.

In analyzing this control report, the sales manager could make the following observations:

Al: Al is a "problem child," below average in both his sales and units per call. It takes Al sixteen calls to get an order! His expenses and units per order are in line but he is inefficient. He should be getting more orders. From Table 2 we see the group is averaging 30 orders for the month and Al's 10 orders for the month is pretty pale performance. Al's units per order ratio and sales per order ratio look good, but they are the result of writing so few orders, not making a lot of sales.

Bob: Bob's units per call (4.8) is above average and he is writing the biggest orders ($6,117) on average. He is also keeping his expenses (9%) in line. But like Al, Bob is not being as efficient as we would like -- getting only 12 orders from his 120 calls.
Table 1
Data for Sales Cost Control Report
Data by Salesperson Source
Sales dollars Sales invoices
Sales units Sales invoices
Number of accounts Sales invoices
Number of orders Sales invoices
Number of sales calls Sales call reports
Selling expenses Sales expense reports
Table 2
Example Month Data Salesperson
Name Units Expenses Accounts Orders Sales Calls
 (U) (E) (A) (O) (S) (C)
AL 450 $450 45 10 $57,150 160
BOB 578 268 67 12 73,406 120
CATE 356 570 56 45 45,212 200
DON 245 400 50 23 31,115 170
ED 890 625 35 60 113,030 175
Average 504 $463 51 30 $63,982 165
Table 3
Salespersons' Monthly Control Report
Name U/C U/O E/S O/A C/O C/A S/C S/O
AL 2.8 45.0 8% 0.2 16.0 3.6 $357 $5,715
BOB 4.8 48.2 9 0.2 10.0 1.8 612 6,117
CATE 1.8 7.9 12 0.8 4.4 3.6 226 1,005
DON 1.4 10.7 16 0.5 7.4 3.4 183 1,353
ED 5.1 14.8 3 1.7 2.9 5.0 646 1,884
Average 3.2 25.3 10% 0.7 8.2 3.5 $405 $3,215

While Bob is not calling on his accounts very much, he is the number two salesperson with sales in excess of $73,000 for the month. Further, his sales per call is $612, second only to Ed's $646. Bob appears to be making every call count by coming back with a healthy order each time he does make a call.

Cate: Cate is having her share of problems. She is calling on her accounts more frequently (3.6 compared to an average of 3.5 times per month) but selling an average of only 1.8 units per call. She is also writing the smallest sales per orders ($1005), but writing an above average number of orders (45 from Table 2). She appears to be working hard but not working smart. Cate is a candidate for additional training in selling skills, time management and account management. While the hardest worker we have, she is the least efficient. Her energies need redirection and focus.

Don: Don is a mess! He is out of line in every category except the calls per order. He only sells 1.4 units per call when the rest of the salesforce averages 3.2. It takes him 7.4 calls to get an order which is better than the group average of 8.2, but he looks so good only because Al and Bob's numbers are so low! His sales per call is the lowest ($183) and probably contributes to having the highest expense ratio of 16%. Don is a candidate for mandatory quotas, additional sales training, and time and territory management skill counseling.

Ed: Ed sells the most units per call and seems to be pretty efficient. It takes him the fewest calls (2.9) to get an order and his sales per order figure puts him in third place. His expenses as a percentage of sales is by far the lowest at 3% of sales, so it looks like he is managing his expenses pretty well. Ed is our sales leader by a wide margin on all accounts and would have to be considered the star of the salesforce.

Using the Computer and Graphics

Computing these ratios and preparing the control report is simple and fast with a personal computer and a spreadsheet program. The necessary data can be captured and the report prepared in even less time, if the salesforce is PC-equipped. Rather than entering the data from source documents it can be taken directly from the sales force's electronically submitted files into the spreadsheet template.

Once the sales cost control report is prepared, a supplemental graphic representation of the data will further enhance analysis and decision making. For example, two graphs were generated from our illustration data and are shown. In the first one, the sales per call ratios were used for the x-axis and the calls per account for the y-axis. The lines dividing the graph into quadrants represent the salesforce's average for each of these ratios.

From Figure 1, we see the best place to be would be in the upper right-hand quadrant. Ed is in this quadrant. His calls per account is higher than average (5.0 vs. 3.5), and, yet, he is making more sales per call ($646) than any of his cohorts. Since a manager would much rather see more sales per call than a lot of unproductive calls, Bob is in the next best quadrant. Bob has sales of $612 per call and calling on his accounts only 1.75 times to get those sales. People in this quadrant have the greatest sales per call and spend fewer calls per account to do it. Bob may have too many accounts and be stretched to make the number of calls he does. Clearly, if Bob is any indication of the relationship between calls and sales, this company would be better off having their salespeople call on fewer accounts more frequently rather than more accounts less frequently.

Cate and Don are not making their calls work for them. They are making an average number of calls per account but their sales per call is below par. This situation could signal a need for additional sales training. They may have difficulty in closing, making an effective presentation, or dealing with objections adequately.

A similar message comes from Figure 2. Here, units per call are graphed against units per order and again, Bob and Ed are in the best positions, while Don and Cate are in the worst. Bob and Ed are making significant sales each time the visit a customer, though Ed significantly lower than Al in terms of units per order. Al, however, could be moved into the "star" category by selling more units which would probably come about if he would make more calls.

If there is a strong relationship between calls and units sold, then by looking at Figure 2, a host of possible managerial actions present themselves. For example, Cate and Don are making enough calls but their sales should be higher. Their problem then is not centered on an insufficient number of calls. It could be in their presentations, ability to close, ability to prospect and qualify, or any number of selling skill related items. They would certainly be candidates for skill enrichment and personal attention from the manager.

Any variety of such graphs or "positioning maps" could be generated with a spreadsheet program and done so without any calculations, scaling or manipulations--the programs do it automatically. Using graphs such as these as a communications tool is effective as well as simple. From the graphs, one would not even have to see any numbers to determine who the problem salespeople are and what their problems appear to be. The graph immediately identifies these salespeople and suggests corrective actions to the sales manager which can be specifically applied to only those people needing specific help.

What Can the Use of Ratios Do For Sales Managers?

Ratios like the ones given here allow the sales manager to make better decisions about their portfolio of salespeople. Some of the people discussed above have problems indicating a need for additional training, coaching or control measures such as quotas. Some of the people are making too few calls while some are apparently having trouble closing sales. A manager can use ratios to discover these problems and then diagnose their source in order to prescribe a cure. Thus, ratios allow managers to home in on specific areas in which specific salespeople need guidance.

Ratios can also form the basis for performance appraisals and goal setting. By having such data available, and by using it to update his/her salespeople, the manager lets the individual know where s/he stands with respect to the group, the quota or the sales branch's targets. By seeing how s/he is progressing, the salesperson can often make self-corrections without significant input from the sales manager. Used in this way, managers and salespeople together have quantitative, easily identifiable, and instantly recognizable information to use in planning or in performance appraisals.

Finally, such ratios can serve as a sound basis for disciplinary actions and terminations. These ratios can be particularly powerful, if they have been a part of the quantifiable goals laid out for and accepted by the employee. If the salesperson has not been living up to his/her numbers and has been given the proper warnings along with the opportunity to improve, then disciplinary actions can be justified and supported. Too many sales managers fail to appropriately document their discussions with salespeople through follow-up memos or personal notes. Keeping numerical ratios like the ones discussed here, is simple and can provide documentation for the sales manager's personnel decisions.

While the focus of this discussion has been quantitative in nature, every manager should remember that quantitative information must be supplemented with qualitative information as well. No decision should be based solely on the numbers without examining the circumstances behind those numbers. Also, no quantitative data should be blindly relied upon without investigating the trends and cycles of that data. While our examples have been centered on monthly data, a sales manager would want to track the data over several months to identify trends as well as short-term aberrations.


Selling, general and administrative costs are an increasingly significant cost of doing business. A major component of these costs is selling cost. Following the principle that control reports should focus management attention on the significant costs, the selling cost control report described here assists sales managers in making efficient and effective use of a firm's major resource--its sales force. The information contained in this report can be even more effectively communicated to sales managers using the supplemental graphical technique that is illustrated here.

Managing a salesforce is always difficult, entailing the complexities of dealing with a variety of people. The complexities can be reduced to some degree by having quantitative information on which to base decisions. Using a control report of key sales ratios to manage the sales force, will aid the busy sales manager in identifying salespeople who need to be singled out for extra attention, supplemental training, or special recognition. These ratios can also prove to be essential for sales managers who are asked to justify and document their personnel decisions.


1 Robert D'Amore, "Just-in-Time Systems" in Robert Capettini and Donald Chaney (eds.) Cost Accounting, Robotics, and the New Manufacturing Environment (AAA, 1989), p. 8-10.

2 Thomas Peters and Robert Waterman, In Search/Excellence (Warner Books, 1984).

3 The Wall Street Journal, December 6, 1989.

4 Business Week, July 10, 1989.

5 Thomas Dudick, "Why SG&A Doesn't Always Work," Harvard Business Review, January-February, 1987.

6 Ibid.

7 Ibid., p. 32.

8 Robin Cooper and Robert S. Kaplan, "Measure Costs Right: Make the Right Decisions," Harvard Business Review, September-October, 1988.

9 Numerous articles have been written about activity-based-costing. A particularly detailed series of five articles by Robin Cooper appeared in the Journal of Cost Management beginning with the Spring, 1988 issue and continuing through the Winter, 1989 issue.

David Buehlmann, PhD, CPA, is a professor of accounting at the University of Nebraska at Omaha. He has published articles in a number of professional accounting journals. His current interests are in developing reporting systems to provide managers information to improve business operations.

John Hafer, PhD, is an associate professor of marketing at the University of Nebraska at Omaha. He has published articles in several business/marketing journals. He has completed a text on personal selling and is currently doing research in the area of sales force turnover and telemarketing sales agents.
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Title Annotation:selling, general and administrative costs
Author:Buehlmann, David; Hafer, John
Publication:The National Public Accountant
Date:Sep 1, 1992
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