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Budgeting on a Commission

A Few Ideas on How to Budget When Your Salary is Commission-Based

There are a few different ways to receive payment for work performed; you can be an hourly employee, working on a fixed salary, completing a project for a contracted amount, or working for a percentage of the sales you make (AKA Commission).  There can also have a combination of these methods of payment – you can work on a salary up to a certain amount of hours and then qualify for overtime at an hourly rate.  An employee can have a base salary and get a commission for sales.  Generally speaking you wouldn’t have both a salary and a contract payment but almost any other combination is possible.  I recently started in a position with a sales role.  While I’ve been in sales in one way, shape or form before, this was my first foray into a pay structure that involved commission.  I have a base salary, but the question came up – how do you budget for commission?

100% Commission

100% commission doesn’t pertain to either Sarah or I.  I’m aware however that there are sales roles that deal in 100% commission.  The commission percentage is usually pretty high.  Since your company is only paying you based on your performance there is a certain level of job security.  This might seem like a scary concept to anyone who has always had a steady paycheque, but all it takes is discipline.

First off – you’ve got to be a closer!  Always be closing! If you can’t make the sale you should probably change jobs.  You are going to have ups and downs of course.  Those you can deal with.  Where the discipline comes in is making sure that your lifestyle cost is lower than your average commission.  If you have a nice month and bring in an extra $1,000 you don’t have assigned to anything – you need to hold that for the month you are short.  In the blogging world – this also applies to freelance writers.  A freelance writer is really a salesperson who works for a 100% commission on their sales.  Their product happens to be writing – but it is no different than the person selling insurance plans.

The First Few Months – Data Gathering

The first few months you may need to really buckle down and make sure your spending is barebones.  In order to figure out an average you need data and that’ll only come with time and experience.  What you don’t want is to end up running up a line of credit while you figure out your stuff.  All that does is add another fixed expense to contend with.  Once you have a solid idea of what you can expect to bring in on an average month – you can (carefully) budget based on that.  You’ll want to keep some wiggle room in your budget – so you can assign a small amount to variables like entertainment or even retirement savings if necessary.

Retirement savings can be very important in a role with uncapped commission since your income may skyrocket at any time during the tax year.   It also becomes even more important to have an emergency fund in place – you should be prepared to go a few months with no income and still have enough to cover your base expenses.  That way you’ll have some time to figure out a new source of employment if needed.

SAMPLE SCENARIO #1

Your commission is set at 10% of your monthly sales.  The first month you sell $25,000, the next $35,000.  The third month is really slow – the leads are weak.  You spend the slow time building some new contacts and the fourth month you reach $42,000.  So based on the first third of your year, you have a monthly average of $27,250 in sales – which equates to $2,725 in income (or just under $33,000 per year).  If this is me – I base my expenses on no more than $2,200/month and divvy up the rest to retirement and possible some more entertaining budget line items (like a few nights out).  The same sales cycle might repeat – in which case you’ll need the extra dough for those months where my sales fall short.

If the bad times continue – well it is really no different than a job loss.  You don’t do your job, eventually you’ll lose it.

Mixed Bag

If you do get a fixed salary, and have a commission structure to supplement your income the way to budget depends heavily on your paygrade.  Your base salary is a living wage for example – ideally you want to base your fixed expenses on that.  Generally speaking, this means that you’ll have a pretty low percentage take on your sales – maybe 1% or lower.  In this scenario I’d recommend treating your commission like a bonus – it isn’t part of your compensation package but you get some extra cash to play with every once in a while.  This is great money to put aside for retirement, special projects around the house or to have a bit of fun with.

If however your salary is minimal, you can treat your budget in a very similar way that you would if you were 100% commission.  The advantage you have is that you get a bit of insulation for those bad months.

SAMPLE SCENARIO #2

If I look at the sample scenario #1 – but change the commission to 5% but add a base salary of say $15,000 a year.  Sales numbers stay the same but instead of a monthly average of $2,725 you have $1,362.50 commission plus $1,250 salary.  Now your total is $2,612.50.  You have less money – but you won’t have that month where you only bring in less than $1,000.  A minimum of $1,250 is better than a minimum of $0 in my books.

DINKS & DEWKS

If you are a DINK (dual income no kids) or a DEWK (dually employed with kids) it would be very helpful if one of the two work on a set salary.  This provides some financial stability that helps tremendously – especially if you do have kids or other dependents.  Of course you can’t base who you spend your life with on their compensation type.  Well you can – but I wouldn’t recommend it.

Regardless of the structure – it is very important that both earners be a part of the financial decisions and are comfortable with the budget.  We really can’t say it enough – open communication is your best tool for success in any relationship.

IF AT FIRST YOU DON’T SUCCEED – TRY TRY AGAIN!

Earlier in the post I mentioned how you’ll need some time to gather your data to figure out your averages so you know what to base your expenses off of.  While a few months gives you a good idea – a few years is better.  The more examples you have of how a month goes the more accurate your average is going to be.  So you start with a barebones budget when you have no information, then you bump things up if possible after a few months of data.  Then at the very least you should revisit your budget on an annual basis to check on those averages.  If things are slower than anticipated you may be heading for a financial shortage.  Alternatively you may have a bit more room to sink more money into retirement savings, a TFSA or other method to sock away some extra cash for the future.  After all – you may not want to play the sales game for that long; it is a tough racket.

Do you have commission as part of, or all of your compensation structure?  How do you budget with commission?

Scott

PS: Sorry for all the Glengarry Glen Ross references – it is a fantastic movie and a much watch for anyone in sales.

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