If you own a business, you know that keeping your financial metrics in line is a critical part of your daily operations. Balancing the amount of money that you spend on key areas of your business with the amount of revenue that your business generates is a fine balancing act that requires a lot of time and experience to do correctly. But getting the financials of your company wrong can lead to immediate and significant harm to your company’s health and to you and your employees.
Owners Love Sales
Owners understand that their products and services don’t sell themselves. And because most owners were, at some point in their company’s history, involved in sales themselves, they turn to what they know best: hiring and building large sales teams.
But what they don’t realize is that even though sales teams are typically good at closing deals, solely relying on them to generate new leads isn’t the most cost-efficient way to grow their business. In general, marketing is better at generating leads than sales teams are, and sales teams are generally better at closing deals than marketing teams are.
So, the right answer is, that as companies grow they need to strike a balance between how much money they spend on the sales team and how much are willing to allocate to a marketing budget.
How to Use Your P & L Statement
When we speak with business owners, we find that they have a firm grasp on certain financial metrics. And with these numbers in line, they can keep their company financially healthy. However, when we dig a bit deeper, what we also find is that companies, especially older organizations who have larger sales teams, underfund one aspect of their company, and compensate for that mistake by significantly overfunding another. And, in doing so, spend more overall money than if they were to fund both areas correctly.
On a P&L statement, we normally see that owners merge “Sales & Marketing” into one line.
And because “Sales & Marketing” are merged into one financial budget allocation, and with owners thinking that the sales team is the primary mechanism for growth, we see marketing allocations squished, or eliminated entirely.
What Do Most B2B Companies Budget for Sales & Marketing?
Most businesses allocate a percentage of their actual or projected gross revenues towards the Sales & Marketing budget. For businesses in the B2B manufacturing segment, the magic number for most is that they allocate around 20% into this combined bucket. However, for all the reasons that we mentioned above, we see that the split between sales and marketing teams is uneven. A budget for marketing is typically underfunded, ranging between 0 and 3 percent. (for run-rate marketing program and not a startup company)
Note: We see that this 0 to 3 percent allocation changes dramatically depending which industry that the business is in, the size of your business, and its growth stage. For example, during the early brand building years, businesses often spend much more on marketing – up to 20-50% percent. OR for small companies that are just getting off the ground, they allocate much less, having close to no marketing budget at all.
What is the Right Percentage of Revenue That Should be Spent on Sales & Marketing?
A well-established financial guideline is that B2B businesses who have revenues less than $50 million, but greater than 1 Million, should allocate between 7 and 8 percent of their revenues towards marketing and about 10 to 13% towards their sales budget.
Like all financial guidance, these numbers are not a hard and fast, and there are factors that impact this allocation. For example, your businesses’ gross margin, rent, overhead and desired growth. I should note that this percentage also assumes you have margins that exceed 10% percent (after you’ve covered your other expenses, including marketing). If your margins are lower than this, then you might consider eating more of the costs of doing business by lowering your overall margins and allocating additional spending to marketing. However, for an average B2B business, these numbers are a good guideline and numbers that we feel comfortable standing behind.
Revisit Your Budget Often & Track ROI
Once you have developed your marketing plan and budget, remember that it needn't be fixed and inflexible. There may be times when you need to adjust your budgets based upon staffing or unplanned campaigns or opportunities. At the end of the day, knowing whether what you are spending is helping you achieve your sales and marketing goals is more important than sticking to your budget.
At a minimum, marketing budgets should be maintained on an annual basis, and revisited if you launch a new product/service, or if the market landscape changes. At IQnection, we prefer to review budgets quarterly, and make budget adjustments based success/failures and upon projected revenues for the quarter.