What it means
Sales quotas are targets for revenue, units sold or new customers in a period, such as a quarter or a year. Managers set them by dividing the company's overall goal among the sales team, taking account of territory size, past results and market conditions.
Quotas give salespeople a clear aim and give finance a basis for forecasting. Many sales compensation plans link pay to quota attainment, which is the percentage of the quota achieved.
A representative who hits 100% earns the target bonus, and plans may pay more at higher levels. Well-designed quotas reward effort and results without encouraging unhealthy behaviour, such as discounting heavily or pushing deals into the wrong quarter.
Setting quotas is a balance. If they are too easy, the company pays bonuses for ordinary results, and if they are too hard, staff lose motivation and leave.
A common approach is to set quotas so that most of the team can reach them when performance is good, with some stretch for strong performers. In international trade, a quota is a government limit on the quantity of a good that can enter or leave a country during a period.
Governments use import quotas to protect local producers or manage supply. Importers must plan around the limit, because once the quota is full, extra shipments may be blocked or face higher duties.
There are other uses as well. Production quotas cap how much a factory or a cartel member may produce, and membership bodies set contribution quotas for their members.
In every case the quota sets a limit or a goal that managers must plan around, and the finance team should model its effect on revenue, cost and cash flow. Quotas also affect financial reporting and forecasting.
Sales quotas feed the budget, commission accruals depend on expected attainment, and trade quotas can affect inventory planning and purchase commitments. Finance should therefore model what happens if attainment is well above or below plan.
In practice
Real-world examples.
Example
A software company gives each account executive an annual quota of $1,200,000 in new contracts. The sales director reviews attainment monthly and moves leads to those who are behind. The finance team uses the combined quotas to build the revenue forecast, applying a haircut because not every representative will reach 100%.
Example
An importer of canned fish learns that the government has set an annual import quota for the product. Once the quota is full, further shipments face a much higher duty. The importer spaces its orders across the year to stay within the limit.
Example
A regional bank sets a quarterly quota of new small-business accounts for each branch. A branch manager who is behind holds a local networking event to attract customers. Head office tracks the numbers weekly.
Formula
Calculation
Quota attainment = actual results / quota x 100
Suppose a sales representative has a quarterly quota of $500,000 and closes $450,000 of sales.
Step 1: divide actual results by the quota = $450,000 / $500,000 = 0.90.
Step 2: convert to a percentage = 0.90 x 100 = 90%.
If the plan pays a bonus only at 100% attainment, the representative would be $50,000 short of the target.Case study
Seen in the real world.
Redwood Office Supplies is a fictional wholesaler used for illustration. Its sales director set a flat quota of $400,000 per quarter for every representative, regardless of territory. After two quarters, representatives in the busiest city beat the target easily, while those in rural areas missed it by large margins and began to resign.
In this illustrative story, the finance team analysed the potential of each territory and proposed quotas based on the number of businesses and past sales. The new quotas ranged from $300,000 to $520,000. Turnover dropped, and total sales rose because representatives felt the targets were fair.
The finance team also introduced a rule that commission accruals are reviewed each month against actual attainment, so that bonus costs no longer came as a surprise at year end. Representatives could see their progress in a shared dashboard. Management said the transparency reduced disputes about how targets were set.
Watch out
Common mistakes.
- Setting the same quota for every territory. Differences in market size make a flat target unfair.
- Ignoring side effects. Aggressive quotas can lead to heavy discounting or bad-fit customers.
- Forgetting that trade quotas can sell out. Importers should plan shipments before the limit is reached.
Questions
People also ask.
What is quota attainment?
It is the percentage of the quota achieved, found by dividing actual results by the quota and multiplying by 100.
What is a trade quota?
It is a government limit on the quantity of a good that can be imported or exported in a period.
How should a sales quota be set?
It should reflect territory potential, past performance and company goals, and be reachable for most of the team in a good year.
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