MODULE BUDGETING 16

3 Lectures
TOPICS
1 Sales budgets – Purpose of sales budget 2
2 Salesman expenses control, estimating the cost of distribution 4
allocation of field sales resources, designing sales territories,
procedure for designing
3 Determining manpower requirements, recruiting, methods and the 3
selection system
4 Sales Audit and Analysis – Control of sales efforts and costs. Sales 6
quotas, types of sales quotas, its purpose and managerial evaluation
Classroom Discuss on Acculturation and Enculturation 1
Discussion

Although they are very similar and are often used together, a sales forecast and a sales budget
have some very important differences. The sales budget is the company's expectation of what
should be achieved for a specific time period. It is written first, usually for a year or a fiscal
quarter.

The sales forecast, on the other hand, is written after the sales budget has been set
and estimates what will actually be sold during a time period. The sales forecast is usually
written by the sales department. In other words, the sales budget sets the company's goal, while
the sales forecast shows how likely the company will reach that goal.

Sales Budget implies a formal quantitative statement of income and expenditure for a certain
period. It is a plan for the resources allocated for the completion of the activities, that requires to
be followed, to achieve the desired end. It is not exactly same as forecast, which is a simple
estimation of the future course of event or trend. 

A sales budget provides an estimate of the volume of goods and services that a company
proposes to sell in a future period. It is usually made for the following year. Most sales budgets
include monthly and quarterly figures as well. Additionally, the budget provides details in both
dollars and units.

Eg. A clothes merchant estimates his sales budget yearly. Based on the past sales trend, he
observes that he sells the highest during the festive season, marriage season and the first week of
every month.

Accordingly, he plans his inventory, salespeople, finances, and other resources to earn a
maximum profit and minimize the dead stock.

Importance of Sales Budget :

1) Business Budgeting :

The budgeting of different departments might be dependent on the Sales Budget. This is
especially true in a production company where the production expenses are proportional to the
amount of sales you hope to achieve. Without expected Sales Budget, the company doesn’t know
how much to spend on Marketing, how much to spend on production and in any other
department. While these are variable expenses, the fixed expenses like rent and utilities also have
to be covered from sales budget.
2) Growth Goals :

Another aspect of Sales Budget is that it sets targets for the Sales team and achieving those
targets will help the company to grow economically and expand. The Sales team is motivated by
giving incentives on hitting numbers and crossing them. The company can expect an overall
growth in every department once Sales numbers are achieved.

3) Performance :

Sales Budget is prescribed to the Sales team at the beginning of the year and the targets are
distributed accordingly. At the end of the year, this budget can be used to know the performance
of the sales team and, in turn, the performance of the organization. This depends on the
forecasting done and also on the market conditions and competitor activities. But Sales Budget
helps analyze the performance of every sales team member quantitatively.

3. You will have an action plan in advance. A company that wants to succeed must have a
strategic development plan. Are you wondering how to do it? Just think of steps for several
months or a year. Don’t forget to take into account the available resources and market
opportunities that are necessary for achieving the goals. It also will show you:

 possible problems and solutions;

 best action scenario;
 balance between desired and possible.
4. Accurate control and simple performance measurement. You can control a variety of
factors that influence the final result with help of a budget. Constant monitoring of its
implementation allows to respond to changing situations quickly and act. If the control is carried
out systematically and carefully, then the company’s management gains valuable experience,
which allows developing a more accurate, realistic plan in the next cycle. So the accuracy of
planning increases each time. The management system of the company becomes more efficient
and effective.

5. Convenient assessment of the work of managers. Budget items determine the responsibility

of managers and their proper use of HR software. Almost all companies that have introduced a
system of budgets use it to evaluate the work of heads of departments.

6. The budget can be used as a means of motivating employees. The manager of the structural
units receives not only greater independence by participating in the preparation of the
consolidated budget, but also greater responsibility for the effective use of funds and the
achievement of goals. Based on the implementation of the tasks set, it is convenient to build a
system of incentives and motivation of employees.

7. Strengthening coordination and communication between departments. Coordination

between departments of an organization is an important element of a company in which the
heads of departments independently make decisions. The introduction of a sales budget in the
organization is impossible without the transfer of information from one unit to another. For
example, on the possibilities of purchasing raw materials, prospects for selling goods, equipment
needs, etc.

Sales Budget Process

Preparing a sales budget is a step by step process. It involves keen observation, research, analysis
and decision making.

Let us now go through the various stages of preparing a sales budget:

1. Decide a Period of Sales Budget: A sales budget can be planned accurately if a specific
period is determined. It can be made monthly, quarterly or yearly.
2. Collect Previous Sales Data: The next step is gathering the sales data or record for the
previous period. It acts as a base to plan a sales budget for future sales.
3. Gather Industry’s Sales Information: The company needs to be updated with the total
sales of the particular industry for a specific period. It should be aware of its market share
and the expected growth of the industry within that period.
4. Compare Sales of Consecutive Period: After collecting the sales records, a comparative
analysis is required of the previous sales periods to predict the future sales possibilities.
5. Study Current Market Trends: Next step is keeping an eye on the market fluctuations,
preference and trend which helps in determining a more accurate sales budget.
6. Communicate with Customers: The customer reviews and buying habits should be
analyzed to know their buying trends and intentions for preparing a sales budget.
7. Prepare Sales Forecast: Based on the above data and analysis regarding past sales,
market trends and customer’s response, sales for a particular period is forecast.

1. Compare Actual Sales with the Forecast: Finally, the actual performance or the sales
volume is compared with that of the estimated sales to find out the accuracy of the sales
budget. It provides for taking the corrective measures in future.

Factors Influencing Sales Budget

The sales budget is not a vague assumption of sales. However, it is a well-planned strategy to
streamline the various business operations and set some realistic and achievable targets for the
team.
It is framed by different factors existing in the business environment. These factors can be
bifurcated into the following two categories:

1. Internal Factors
2. External Factors

Internal Factors

The company’s inner strengths or weaknesses, influence its sales budget. It involves factors like
plant’s production capacity, marketing channel, promotion and advertisement, sales volume and
revenue, etc.

Let us now discuss these factors in detail below:

 Sales Trend: The past sales made by the company within a specific period plays a
significant role in determining future sales possibilities.
 Production Capacity: The maximum utilization of the plant’s manufacturing capacity
should be considered for the preparation of the sales budget.
 Product Diversification and Product Development: When the company enters into a
new product line to increase its sales volume and profitability, it must prepare the sales
budget accordingly to facilitate product development.
 Seasonal Fluctuation: The company has to figure out the changes in the sales trend during
seasonal fluctuations like weekends, the first week of every month, festivals, etc. while
determining the sales forecast.
 Selling and Distribution Channel: The selected marketing channel profoundly affects the
sales forecast. Like for direct sale of goods, a more accurate sales data can be gathered,
and hence a better sales estimate can be prepared.
 Sales Promotion and Advertisement: If the product is well promoted through
advertisements, offers, discounts, etc.; it increases the potential sales and thus influences
the sales budget too.
 Price Fluctuation: The change in the price of the product creates an impact on its
potential sales. Therefore, the price of the product, as well as the price of the competitor’s
product, must be taken into consideration while deciding the sales budget.
  Market Research: Research is the basis for determining sales possibilities. Sales
forecasting is not just prediction but is a practical approach depending on the past market
trends.

External Factors

The external environment of the business consists of multiple opportunities as well as specific
threats which affect all the business decisions.

These factors comprise government intervention, economic condition, technological

advancement, consumer demand and competition.

To know about these factors in detail, read below:

 Government Policy and Intervention: The government controls the trade practices and
the sale of specific products by imposing various laws and policies, thus affecting the sales
budget too.
 Competition in the Market: The number of competitors and their market share should be
well analyzed by the company at the time of drafting the sales budget to avoid wastage.
 Change in Consumer Preference and Demand: The study of consumers’ behaviour
towards a particular product and their buying trends helps in close by sales prediction.
 Technological Development: When the technology changes, the risk for downfall rises.
Therefore, the company must be updated with such changes to analyze the shift in
consumer’s preference and market occupancy.
 Economic Condition of the Country: The distribution of wealth within the country and
its financial stability regulate the sales and performance of the company. At the time of
recession when people’s spending capacity decreases, the company tends to set the sales
budget accordingly.

Need for Sales Budget

A company always encounter questions like; How much to produce? How much revenue can be
generated from sales? What about the dead stock? What all expenses to be incurred in selling the
products?

Sales budget answers all such questions. It is the basis for all the operational decisions taken in
the organization.

To further understand the importance of preparing a sales estimate in the organization, read

below:
  Determine Sales Goals: Sales budget sets a target for the sales team which they have to
achieve. The expected sales volume for a particular period is determined, and the efforts of
the sales department are directed accordingly.
 Cash Flow Management: The company can estimate its future cash inflow and outflow
through sales budgeting. This helps in determining the potential liquid cash and prepares
for unfavourable market conditions.
 Estimate Overhead Costs: It also estimates the various administrative and sales expenses
which the company has to bear other than the manufacturing cost. Thus, determining the
potential profit margin.
 Develop Core Strategies: A sales budget provides a base for action to the managers. The
managers frame their strategies and utilize the resources to attain the desired sales goals.
 Streamlines Business Process: All the business activities, i.e. production of goods or
services, financing the operations, engaging the human resource and marketing activities,
are based on the prepared sales estimate.

Salesman/force control :

Sales force control involves measuring sales force performance, comparing it with standards,
detecting deviations and causes, and, if necessary, taking corrective actions so that performance
takes place as per plan.

Effectiveness of sales force Management, to a large extent, depends on controlling mechanism

practiced by the company. Control keeps sales people alert, active, creative, and regular in their

efforts. Suitable controlling system is essential to both, company and salesmen. It is to be

mentioned that very strict or very liberal controlling system is not advisable. After analysis of

nature of sales people, type of work, degree of cooperation, and other relevant variables, an

appropriate controlling system should be designed.

Note that control is not for fault-finding or punishing others, but is meant for keeping them right.

Its purpose is not to keep unnecessary watch on them, but to prevent them make mistakes, and, if

necessary, to take suitable corrective actions.

Sales force control includes verifying sale force performance and taking corrective actions, if

needed. It can be defined as: Sales force control involves measuring sales force performance,

comparing it with standards, detecting deviations and causes, and, if necessary, taking corrective

actions so that performance takes place as per plan. For exercising control over sales force,

mostly, sales volume, time, expenses, discipline, activities, etc., are used as bases for measuring

and comparing performance.

Controlling Process:

Sales force controlling process involves four steps:

1. Setting Sales Force Standards

2. Measuring Actual Sales Force Performance

3. Comparing Actual Performance with Standards

4. Correcting Deviations and Taking Follow-up Actions

Sales Force Controlling Methods:

Several methods are used for controlling sales force efforts. Methods depend on areas, criteria, or

aspects used for measuring and comparing. In every method, the same steps are followed.

Widely practiced methods include:

1) Establishing sales Territories

Establish sales territories for the members of your sales force. In this way, they will not be
competing with one another and focus entirely on their getting leads and making more and more
sale. In addition to this, when the territory is well-defined to the members of the sales the
chances of missing out on potential customers reduce and it also becomes easy for a salesperson
to establish a relationship with customers to the future business.

2) Allocation of sales Quota

most sales driven businesses define sales quota to each of its employees before one financial
year. Sales quota gives a goal to the salesperson to work on and also help the company to keep
the estimation of revenue generation by the end of a financial year.

The performance of a salesperson can be measured on the basis of sales made by them. However,
sales quota varies from one sales person to another salesperson as depending on the area allotted
to them and products sold by them.

3) Maintaining contact with a salesperson

it is important to keep constant contact with the members of the sales of your sales team. In this
way, you can keep them motivated and also can help them to solve issues that they face in
cracking sales deals.

The sales person can be contacted through phone calls or by face-to-face meetings.

4) Determining authorities and rights of salespersons

it is very important to make your sales team members aware of the rights and duties they have.
By being aware they can perform their job better and efficiently.
 5) Salesman’s Reporting

Reporting is one of the most famous and used methods to keep track of the performances of
salespeople. You should make clear how and when they should report to their subordinators.

6) Complaints and Objection Notes

it is important to keep track of complaints and objection made by both salespersons as well as
customers. reacting to complaints and objections will eventually help you to improve your work
and services provided by your sales team.

7) Analyzing Sales Expenses

Salespeople are usually allocated limited expenses every day so that they can reach customers
without many difficulties.

However, some salespersons are known to take advantage of this facility. Therefore, expenses
submitted by them should be analyzed properly before approving them.

8) Observation and visits and field trips

Managers usually stay in touch with their team members over phone and emails. However, it is
important that you should go out on field trips with your team members at least once in six
months.

This can help you to analyze how your team members are performing and what is their
relationship with your customers. on the other hand, you will come to know about the hardships
that your team members face while working in the field. This can make you more empathetic
towards them.

9) Providing sufficient sales tools:

Sales tools are important for salespeople to make sales efficiently. Sales tools include material
and literature like sales manual, sales literature, order forms, visiting cards, and small video clips
to teach them to make sales effectively.

Sales expense

Selling expense (or sales expense) includes any costs incurred by the sales department.
These costs typically include the following:

 Salesperson salaries and wages

 Sales administrative staff salaries and wages

 Commissions
 Payroll taxes

 Benefits

 Travel and entertainment

 Facility rent / showroom rent

 Depreciation

 Advertising

 Promotional materials

 Utilities

 Other departmental administration expenses

If the marketing function is merged into the sales department, then a number of additional
marketing costs may be included in the preceding list, such as the costs of developing
advertising campaigns, the artwork costs incurred to develop promotional materials, and
social media expenditures .

The proportions of costs incurred can vary dramatically by business, depending upon the
sales model used. For example, a customized product will require considerable in-person
staff time to obtain sales leads and develop quotes, and so will require a large compensation
and travel cost. Alternatively, if most sales are handed off to outside salespeople,
commissions may be the largest component of selling expense. An Internet store may have
few direct selling costs, but will incur large marketing costs to advertise the site and
promote it through social media.

Sales territory :

A sales territory can be defined as a geographical area of a particular group of the customer,

which is allocated for individuals Salesperson or together for a sales territory.

Sales territory is not necessary geographical area, but it also can be several customers. With

changes in the business methodology, many companies have adopted this particular form

wherein they not define the geographic as an area for the salesperson, but the number of

customers has been defined. In other cases territory may not be geographical, but it may be

according to the product, for example, a salesperson who handles the refrigerator department will

have his territory as refrigerator department.

Factors affecting allocation of sales force territory :

1. Ability of sales-forces:

While assigning the sales territories the sales manager is to take into account the ability,

initiative, drive, effectiveness, health and vitality of each salesman which differ widely. Hence,

each salesman is to be assigned the job loads according to his ability.

Any maladjustment will result in frustration or a drag where sales-force does not stay. One

should never cross the limits of individual abilities.

2. Nature of sales efforts:

A given territory has number of customers or accounts. These accounts are not uniform in terms

of efforts to be put in by the sales-force. Some accounts might be easier to handle with little sales

efforts while some might require heavy doses of sales efforts. It is the nature of customers that

decides the degree of input needed.

Therefore, there should not be a blunder of assigning only easy accounts to one and fastidious to

another such policy is likely to create heart-burning among salesmen as their earnings differ,

depending on the results shown. As far as possible combine good, bad and indifferent accounts

so that each has the taste of all the three.

3. Sales effectiveness:

The sales effectiveness of a salesman is not depending merely on ability but on the environment

in which he works. The salesman may be very able and enjoying attractive personality and other

requisites of a good salesman, yet he shines in one territory but may fail in another.

In addition to his competence, environmental factors such as behaviour of customers, customs,

traditions, psychological make-up, religious beliefs, taboos and the like may exert considerable

influence on the sales effectiveness of a salesman. This factor is to be given due weight-age

while assigning the sales job.

4. Nature of the product

The nature of the product is of utmost importance to ascertain the size of sales territories. There
are certain consumer products which have constant demand in the market. These are generally
high turnover goods and need little selling efforts.
Thus, for such products a large sales territory can be assigned. For luxury, large and durable
articles, which need high selling efforts and less turnover, small sales territory can be assigned.

5. Demand for product:

While allocating sales territories to the salesmen, the demand for a particular product should be
taken into account. If the demand for a particular product is constant and frequent, then the
whole sales field can be divided into small sales territories. However, in case of low demand and
infrequently purchased articles, the size of the sales territory should be large.

6. Transport facilities:
The marketing of a particular product depends to a large extent, on the availability of transport
facilities in the region. If the transport facilities like roadways, railways, airways, etc. are
satisfactory in the region, then the sales territories allotted to the salesman can be large.

However, sales fields having poor transport facilities should be divided into very small sales
territories. In case the company has provisions for providing vehicles for its sales force, larger
territories can be assigned as transport bottleneck is avoided. –

7.Competition and frequency of contact:

Competition cuts the size of the sales territory and increases the frequency of contact. In other
words, the salesman has to meet dealers and customers more frequently in highly competitive
sales territories. This is highly essential to maintain the market for the product. Therefore, where
the competition is intense, the sales field should be divided into small territories.

On the other hand, limited competition or near monopoly situation lengthens the frequency of
contacts between the salesman and the dealer and customer. In such situations, the salesman can
be assigned larger sales territories.

8.Population:
The density of population in a particular area also determines the size of its sales territories. In
case the company sells through middle men like wholesalers, dealers, retailers etc., larger sales
territories can be allocated to the sales force. On the other hand, if the product is sold directly to
the consumers or if a very few middlemen are used, small sales territories can be assigned to
salesmen.

9.Advertising and sales promotion activities:

Advertising and sales promotion activities make the salesman’s task comparatively easy.
Companies which have widespread advertising and intensive sales promotion activities, can
assign large sales territories to its salesmen. This enables them to sell extensively in their
respective areas. On the other hand, low advertised products need small sales territories for each
salesman.

10.Ability and experience of salesman:

The size of the sales territory also depends on the ability and experience of the sales force.
Experienced and talented salesmen are able to sell more. Therefore, they can easily be allotted
with large territories. On the other hand, new and inexperienced salesmen are usually allocated
small sales territories as their ability to sell is limited as compared to experienced salesmen.
Benefits of Sales Territory Planning

If you’re doubting the value of a strong sales territory plan, consider these inarguable benefits:

More time spent selling

A strong territory plan allows organizations to maximize their sales momentum by aligning the
right sales teams to the right opportunities. Studies by industry analysts consistently show a
decline in sales productivity due to factors such as extensive traveling, the need to learn and
understand new segments, and administrative overhead.

With a clear sales territory plan based on geography and sector, salespeople can spend less time
traveling and preparing for customer engagements, and more time working directly with
customers.

Better customer service

By aligning your salespeople to a set of accounts that aligns to their background, expertise, and
geography, they are better able to understand customer needs and build solutions that align. With
consistent territories, salespeople can build long-term relationships, leading to higher customer
loyalty and repeat business.

Balanced workloads

Workload is measured in time and effort required to adequately manage all accounts in a given
territory. A strong territory plan compares workloads and designs territories so that each
salesperson is at full capacity, maximizing their potential.

Designing sales territory

1. Analyze your business goals and objectives

The first step to drafting a solid sales territory plan is bringing clarity to your company’s
landscape, defining organizational goals, and evaluating industry trends. This is a basic step to
ground you and your team on what you’re trying to accomplish with your sales territory plan.

As you go through the subsequent process, you should continually refer back to this data to
maintain a pulse on whether your plan accomplishes what you’ve set out to do.

To get the juices flowing, start by answering these key questions:

1. What is your organization’s most current vision, mission, and north star objective?
2. What are the key trends in your industry or market?
3. What pain do your offerings solve for customers?
4. What are your sales goals, in numbers?
5. What is your conversion rate? Based on this how many prospects should you have in your
funnel at any given time to ensure that you’re meeting your sales goals?
6. Are there specific products/services that you are selling more than others? Why?
2. Analyze your prospects and customers

The next step is looking deep into your customer base. In addition to understanding their
businesses, challenges, and unique traits, it’s important to identify what makes them unique and
what sets them apart from each other. Key questions to ask yourself include:

1. Who are your most profitable and lucrative prospects and customers defined by industry,
region, product, etc.?
2. What do these customers have in common? 
3. Which of your prospects or customers offers the most profound growth opportunities for your
company?
4. What are your customers buying today and what does this tell you about their challenges and
opportunities?
5. Are their industries you serve with success? Are their industries that you’ve had less success
with?
6. When customers and prospects object, what is the biggest reason why?

3. Determine your Total Addressable Market

Your Total Addressable Market (TAM) is the entire body of prospects and customers that fit
your ideal customer profile. Traditionally, organizations use data including industry, location,
size, and revenue to begin mapping their TAM. While this is still important, technology and
tooling makes it easier than ever to identify prospects within your TAM that may not be so
obvious.

Using traditional and modern sources, even tools like social media, look for company and
industry look-a-likes that may be a suitable candidate for your offering.

Once an ideal customer profile is solidified, the next step is to figure out how large the market
opportunity is that fits the description. You may use a matrix to include a range of large and
small markets which present large or small opportunities.

While estimating the size of your market used to be a struggle of guesswork and complicated
calculations, there are now tools available to businesses to automate the TAM discovery process.

4. Perform a SWOT Analysis

A simple way to evaluate your position in the market is to perform a SWOT

(Strengths/Weaknesses/Opportunities/Threats) analysis. Since we all have blind spots, a SWOT
analysis is best performed with the help of a broader team, including other company leadership,
as well as members or your sales management and sales rep teams.

o What Strengths will you build upon?

o Which Weaknesses do you need to mitigate?

o Which Opportunities in your marketplace are you suited to take advantage of?

o What Threats in your selling environment will you defend against?

In doing this analysis, you will start to see patterns that indicate areas of your business that
require more or less attention for various reasons.

For example, a strength that’s also a large opportunity may need a dedicated territory. On the
other hand, an area that aligns to a serious competitive threat may require special attention to
protect your company’s place in the industry.

The SWOT characteristics you identify will not always be related to revenue or geography. They
may be related to more obscure things like training needs of your sales team, gaps in systems and
tools, or even gaps in your products themselves.

Doing this analysis will help you be aware of other ways to think about your business and
territories.

5. Determine and Document Sales Territories

Based on the work you perform in the sections above, you should have an idea of how to divide
your sales territories. It’s important to document these clearly, outlining details of each territory
including things like:

– Geographic Boundaries
– Industry or Segment Boundaries (including any overlap and how that is addressed).
– Revenue Boundaries
– Product Boundaries
– Anything else that may be applicable to your sales organization.

6. Devise an Action Plan

Similar to the SWOT analysis, devising an action plan is a group exercise that should include
various stakeholders in the company, specifically the leaders of each of your identified
territories. Just as well, the action plan should be built to be nimble.

In a world where market opportunities change every day, the sales territory plan should be built
to follow, ensuring that your action plan keeps up with changing opportunities and threats.

Gone are the days of an annual territory and action planning session. It’s important that change
management is built into the framework to ensure your teams are not caught off guard with
changes.

Within each category, you should answer the following questions:

– What is the territory’s quota?

– What is the territory’s quota stretch goal?
– What is the territory’s closed business YTD?
– What is the territory’s gap?
– How much pipeline do I have today?
– What is the territory’s pipeline gap?
– What are my goals for the year?
In addition to the overall territory, you will need to spend time looking at top accounts and where
they fit in your territory plan. List top accounts and explain why they are chosen (relationships,
industry fit, target profile).  For each, in one sentence, be clear and focused on the outreach
strategy.

Next, create an opportunity map and make sure opportunity plans are thorough. What’s the
compelling event? Why now? What’s the strategy to engage with a champion and economic
buyer? What’s the mutual success plan?

Finally, close out with strategies to build your sales funnel.

In addition to being responsive to external factors, action plans should be reviewed on a quarterly
basis to ensure your plan isn’t going stale unintentionally.

7. Track Performance and Stay Adaptable

Once you’ve devised and implemented your territory plan, it’s important to regularly measure
success in each territory and adapt as needed. Metric reviews should happen on a regular,
defined cadence such as monthly or quarterly, and should be automated using sales performance
tools to avoid making this a manual, costly, and easily avoided overhead.

Sales Department- Manpower planning, requirement, recruiting, methods of selection.

Manpower Planning. Manpower Planning which is also called as Human Resource Planning
consists of putting right number of people, right kind of people at the right place, right time,
doing the right things for which they are suited for the achievement of goals of the organization.

Edwin B. Geisler defined as, “Manpower planning is the process, including forecasting,
developing, and controlling by which a firm ensures that it has the right number of people
and the right kind of people at the right places at the right me, doing work for which they
are economically most useful.”

Objectives of Manpower Planning:

The objectives or importance of manpower planning are given below:

1. Optimum Productivity:

Skilled and qualified workers are recruited or they become so through the training programme
provided by the organization, through the manpower planning. Hence, an organization can
achieve the effective optimum utilization of human potential, which will result in optimum
productivity and thereby, the production is carried out on uninterrupted.

2. Reduction in Labour cost:

Effective use of manpower, and optimum productivity will reduce the wastage. It will reduce the
labour cost.
3. Effective Recruitment and Selection:

Right person can be placed at the right job and at right time through manpower planning.
Because future need can be predicted by manpower planning. Therefore, effective recruitment
and selection can be achieved so that no need to spend much amount on the training and labour
turnover can be reduced.

4. Group Satisfaction:

By establishing mutually satisfying work relationship between all the members of the
organization, group satisfaction and team spirit can be achieved.

5. It helps in maximizing individual development.

6. Effective manpower planning may help the management in developing the good employer-
employee relationship. It leads to improve the industrial relations.

7. It maximizes the contributions and the satisfaction of the employees of a business.

8. It gives due consideration to the capacities, interests, opportunities and reactions of the
workers.

9. To develop the future training and management development needs.

10. To avoid the staff surplus and unnecessary dismissals in the manpower planning.

11. To control the wages and salary costs.

Factors Affecting Manpower Planning:

Manpower planning exercise is not an easy tube because it is imposed by various factors

such as:

1. It suffers from inaccuracy because it is very difficult to forecast long-range requirements of

personnel.

2. Manpower planning depends basically on organisation planning. Overall planning is itself is a

difficult task because of changes in economic conditions, which make long term manpower

planning difficult.

3. It is difficult to forecast about the personnel with the organisation at a future date. While

vacancies caused by retirements can be predicted accurately other factors like resignation, deaths

are difficult to forecast.

4. Lack of top management support also frustrates those in charge of manpower planning

because in the absence of top management support, the system does not work properly.

5. The problem of forecast becomes more occur in the context of key personnel because their

replacement cannot be arranged in short period of time.

Process of Manpower Planning:

The planning process is one of the most crucial, complex and continuing managerial functions

which, according to the Tata Electrical Locomotive Company, “embraces organisation

development, managerial development, career planning and succession planning.” The process

has gained importance in India with the increase in the size of business enterprises, complex
production technology, and the adoption of professional management technique.

It may be rightly regarded as a multi-step process, including various issues, such as:
A. Deciding Goals or Objectives:

The business objectives have been determined; planning of manpower resources has to be fully

integrated into the financial planning. It becomes necessary to determine how the human

resources can be organised to achieve these objectives.

For this purpose, a detailed organisation chart is drawn and the management of the company tries

to determine “how many people, at what level, at what positions and with what kind of

experience and training would be required to meet the business objectives during the planning

period.” The management of this company considers a time 5 pan of five years as an optimum

period for this purpose.

It stresses the specific and standard occupational nomenclature must be used without which “it

would not be possible to build a firm-cum-industry-wise manpower resources planning.” It

suggests the adoption for this purpose of the international coding of occupations. For a sound

manpower planning it considers as a prerequisite the preparation of a manual of job classification

and job description with specific reference to individual jobs to be performed.

B. Audit of the Internal Resources:

The next step consists of an audit of the internal resources. A systematic review of the internal

resources would indicate persons within the organisations who possesses different or higher
levels of responsibilities. Thus it becomes necessary to integrate into the manpower planning

process a sound system of performance appraisal as well as appraisal of potential of existing

employees.

C. Formulation of the Recruitment Plan:

A detailed survey of the internal manpower resources can ultimately lead to as assessment of the

deficit or surplus of personnel for the different levels during the planned period. Whilst arriving

at the final figures, it is necessary to take into account the “actual retirements and estimated loss

due to death, ill health and turnover, based on past experience and future outlook in relation to

company’s expansion and future growth patterns.”

D. Estimating Future Organisational Structure and Manpower Requirements:

The management must estimate the structure of the organisation at a given point of time. For this

estimate, the number and type of employees needed have to be determined. Many environmental

factors affect this determination. They include business forecast, expansion and growth, design

and structural changes, management philosophy, government policy, product and human skills

mix, and competition.

E. Developing of Human Resource Plan:

This step refers to the development and implementation of the human resource plan, which

consists in finding out the sources of labour supply with a view to making an effective use of

these sources. The first thing, therefore, is to decide on the policy— should the personnel be

hired from within through promotional channels or should it be obtained from an outside source.

The best policy which is followed by most organisations is to fill up higher vacancies by

promotion and lower level positions by recruitment from the labour market. The market is a

geographical area from which employers recruit their work force and labour seeks employment.

Example of Manpower Planning:

IT companies are often faced with the business problem of hiring right people for upcoming
projects as well as attrition. These companies have multiple projects going on at a single time
and upcoming projects in the pipeline. If they hire more people without planning they would end
up with many resources on the bench which would eat into profits and if they keep waiting till
the last, they would not have enough skilled people to set up the project and start delivering
eventually leading to customer dissatisfaction and losses.
So these companies keep on forecasting and planning as per the market requirements, latest skill
set and their project pipeline. Most of the times, hired resources cannot be productive straight
away so they need to train them which would require further planning and time.