A privately-held software company based in California is starting to pursue new sales in Europe. The company has already opened a U.K. office as its headquarters in the region, and is now charting its course into other European countries. As executives there begin to budget for these efforts, they are struggling to understand country-level requirements, in part because they are in a bit of a rush. In particular, they are concerned about whether or not they have captured all important expenses. While they can use their U.S. and U.K. expense bases as a starting point, there will be items that are materially different in other European countries, and if these are not properly captured and planned for, they could have a negative material effect on their budget.
Here, we look at the major budget categories and some common pitfalls finance executives face when going into new territory.
Projecting revenues is one of the trickiest parts of the budgeting process. Getting it right requires a true understanding of how the sales cycle may differ from country to country. Here is a current example: for this California-based software company, it takes three to four months to close a $100,000 deal in the U.S. In Germany, this same deal under similar conditions can take six to nine months, and require a lot of customer handholding and a “proof of concept” that most U.S. customers do not require. Since this company is new to Europe and virtually unknown in an established market, it in fact should expect a 12- to 14-month sales cycle. The lesson: Be as realistic as possible when estimating new international revenues, and don’t forget to do your homework.
The largest category of expenses the California company expects to incur in Europe is labor. In this case, employee compensation plus employer contributions to social security and insurance represent nearly 80% of their expense base. Why so high? Here are a few components:
1) Market norms for salary and benefits in Europe are likely to be higher than in the U.S. In the U.S., this California company offers salespeople nominal salaries, with up to two-thirds of compensation riding on commissions. It is also the cultural norm that it — and most U.S. companies — does not offer benefits such as company cars nor car allowances, and that annual vacation is two or three weeks.
If the company were to offer this package to potential sales candidates in Germany, it would not only be hard-pressed to get anyone to interview for the position, it would also be in violation of certain labor laws for failing to meet the minimum vacation requirements. In Germany, salespeople expect a much higher salary and smaller commission, a company car or car allowance, and for the employer to pay half of the health insurance. Last but not least, the legal minimum required vacation in Germany is 20 days, or four weeks.
2) Labor-related taxes can vary significantly country to country. If you were to apply an average percentage, say 15%, across the board for employer-related social security and insurance contributions for all countries in your budget, and you have a large number of people in France and Belgium, the budget-to-actual differences will be material.
For example, the employer’s social security and related insurance contribution costs as a percentage of gross compensation for the California-based software company are as follows:
UK: 13.8% with no ceiling
Germany: 20.18% with a ceiling of €66,000 (U.S. $94,000)
Belgium: 35% with no ceiling
The Netherlands: 35% with ceiling up to €40,000 (U.S. $57,000)
France: 42% with no ceiling
Comparing the U.K. to France, the cost of social security and related insurance contributions varies 28.2%. Multiplied across four sales people in France with an overall package of € 200,000 ($284,000) per person annually, the difference is over € 225,000 ($320,000). This is a material difference for most companies.
These are a typically a smaller overall percent of total expenses for a sales office, but there are still potential surprises. Travel and entertainment expenses, for one, can vary widely per employee depending on their region. In the U.S., air travel can represent a large portion of the overall travel budget for many companies. In Europe, car and train travel can be the dominant means of transportation. Most important, make sure you understand the cultural norms surrounding meals and meetings. In the U.K., a business lunch could mean meeting at a local pub, a meal that would cost under GBP 30 (U.S. $48). In France and parts of Belgium, however, lunch with a customer or prospect will probably include a bottle of wine, with the total bill easily exceeding € 100 (U.S. $160). Several lunches of this kind per month per employee can easily be a sizable five- figure amount annually, and have a noticeable impact on a tight budget.
Marketing expenses – and strategy – are also important to consider upfront. The classic mistake that many American companies make is repeating a winning marketing strategy from the U.S. in other countries. While there are countries such as the U.K. and the Netherland that lean towards a U.S.-style of marketing such as cold-calling, direct mail, and E-mail campaigns, there are others, like Germany, where such marketing programs are not accepted and sometimes illegal. Without some advance consideration, you will more than likely waste good money on fruitless efforts.
In summary, when planning and budgeting for your expansion abroad, take enough time to ensure you have covered all items which could have a material impact on your budget. The more research and homework you do during the beginning stages of your planning, the more likely you are to produce an accurate outcome.
Bill Hite is CEO of Hull Speed Associates, a firm that helps companies set up overseas operations.