1. Flat Expense Account
The flat expense account provides the salesperson with a stipulated sum to cover all expenses during a given period, such as a month or week. Allocation of this sum among different expense items is left to the individual’s discretion. The majority of companies using flat expense accounts do so because this means there is no need to keep expense reports and no need to check expense accounts—two tasks many executives find onerous.
The flat expense account has several attractive features. It makes possible the advance determination of total sales expenses—so it is easy, at budget-making time, to appraise the reasonableness of total planned selling expenses relative to total planned sales. Sales personnel who have flat expense accounts are free to spend their allowances as they see fit, so there should be few arguments over expense accounts. The flat expense account forces sales personnel to control their own expenses, and, if they are guided properly by management, they plan route and call schedules so that each expense dollar is spent to the best advantage.
Successful operation of a flat expense account plan requires skilled administration. This plan works best either (1) when the exact amounts of expense accounts do not need changing often, as with companies whose sales personnel sell staple products in small territories, or (2) when expense allowances come up for frequent review and, possibly, revision. The amounts of the expense accounts should have flexibility built into them. If the plan is inflexible in a fluid marketing situation, sales personnel may not capitalize on sales opportunities requiring expenditures greater than the flat amounts. Even when marketing circumstances favor this plan, management regularly appraises each allowance for adequacy and appropriateness. The great weakness of the flat expense account is the tendency of some sales personnel to over economize. These people come to think of the expense account as a regular addition to salary and do not spend all of it, preferring to save a portion for personal use. Careful sales supervision prevents situations of this sort.
2. Flexible Expense Account
The flexible expense account, sometimes known as the “exact” plan, is the most common reimbursement method. Its salient feature is that sales personnel are reimbursed for all allowable expenses incurred and reported. For this method to work, management must (1) know the total amount of sales personnel’s probable expenses; (2) classify expenses into “allowable” and “nonallowable” categories, and furnish salespeople with clear descriptions of items under each heading; (3) set up a system and forms for the sales staff to use in periodic expense reporting; (4) establish procedures for checking itemized expense reports and for expeditious handling of reimbursements.
The flexible expense account has attractive features. Because of the flexibility, sales opportunities are fully capitalized on as they arise. There is a basic fairness, because this method takes into account and makes payments for differences in territories, marketing conditions, and other factors. Therefore, management can exercise strong control over sales routes and call schedules. Finally, salespersons are under heavy obligation to perform all assigned activities, non-selling as well as selling.
The unattractive features of the flexible expense account come out in its administration. Administrative costs are sizable, because of the large amount of clerical and accounting work in checking expense reports and making reimbursements. Similarly, clerical and accounting work requires a great deal of the salespeople’s time, and many executives contend that good sales personnel are often poor record keepers. Without close control, some people spend the company’s money too generously, this being further aggravated by the opportunity for expense account padding—and many disputes arise.
3. Honor System
Under the honor system, sales expenses are fully reimbursed. Sales personnel do not submit detailed, itemized lists of expenses but report only total expenses for the period. The implication is that management has complete confidence in the honesty of all sales personnel. The honor system is easy to administer and, compared with alternative reimbursement plans, savings occur in both accounting expenses and time. Arguments over questionable expenditures do not arise, and sales personnel do not envision management as parsimonious. Finally, at least in theory, the funds for territorial development are adequate; however, both the amounts and the ways in which they are spent are left to the sales personnel.
With the honor system, management’s control is weak, and this may cause problems. Some sales personnel evolve into free spenders, since detailed expense reports are not required. Others incur expenses from which the company has little chance of deriving benefit. Others appropriate company funds to their own use, for the system encourages people to regard expense accounts as sources of income. These abuses cause inequities in expense allowances, and this may adversely affect morale.
To avoid abuses, management, even though committed to the honor principle, should control individual salesperson’s total expenses. One way is to establish maximum ratios of selling expense to sales. Another is to watch the trend of expenses; sudden and sizable increases in reported expenses, unless accompanied by parallel increases in sales, should be investigated. If dishonesty in expense reporting is detected, remedial action should be taken. In spite of the problems, the philosophy of the honor system lies behind the reimbursement policies and practices of many sales organizations.
4. Expense Quota
The expense quota is a compromise plan for reimbursing expenses. It controls sales personnel’s total expenses over long periods but permits week-by-week variations in the amounts reimbursed. In setting up expense quotas, management first studies individual sales territories and estimates the sales volume each should provide and then establishes upper limits for each salesperson’s total expenses over a specified period.
Under the expense quota plan, sales personnel receive prompt and full reimbursements, regardless of how allowable expenses vary from week to week. The budgeted figures are planned amounts only, and management does not hold rigidly to the upper limits. But because upper limits are established, sales personnel have a moral obligation to keep expenses under control.
The principal drawback of the expense quota is that the burden for controlling expenses is upon the sales personnel rather than upon management. As with all expense reimbursement plans, skillful administration is necessary for successful operation of the expense quota plan. Furthermore, unless sales and expense forecasts are accurate, and unless sales personnel are convinced that the upper limits are estimates only, they may curtail their activities toward the end of budgetary periods because of low balances left in accounts.
Source: Richard R. Still, Edward W. Cundliff, Normal A. P Govoni, Sandeep Puri (2017), Sales and Distribution Management: Decisions, Strategies, and Cases, Pearson; Sixth edition.