Chapter 1 - Introduction to accounting for marketers

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Chapter 1 - Introduction to accounting for marketers
Chapter objectives Structure of the chapter The marketing financial analysis circle Activities associated with marketing financial analysis functions Methods involved in marketing financial analysis What is analysed in marketing financial analysis Basic financial analysis methods Other performance measures Budgeting and forecasting Key terms Whilst it is not necessary to be a qualified accountant or bookkeeper, a basic understanding of what is involved in financial analysis is essential for anyone in marketing. It is too enticing, and often too easy, to use "blue skies" thinking in planning marketing activities. It is even easier to spend money without fully realising the return one is getting for it. It is behoven, therefore, on marketers, to be more disciplined and analytical in the way they go about planning, executing and evaluating marketing plans and strategy. One way of introducing more discipline into the process is by having a basic understanding of the financial implications of decision making, and how financial measures can be used to monitor and control marketing operations. The purpose of this text is to provide exactly that, and the first chapter deals basically with an introduction to the activities involved in financial analysis.

Chapter objectives
This chapter is intended to provide: · An understanding of financial analysis in marketing · An explanation of the various activities associated with marketing financial analysis · A brief introduction to the various financial analysis methods.

Structure of the chapter
The chapter introduces the way in which financial analysis can be used in marketing, and gives a brief overview of the areas in marketing where a knowledge of finance can be very useful, particularly in helping marketers gauge how well strategy is working, in evaluating marketing research alternatives, developing future plans and in marketing control.

The marketing financial analysis circle
http://www.fao.org/docrep/W4343E/w4343e02.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13]

competitors etc. transportation.Chapter 1 .1) Figure 1.1 The marketing-financial analysis circle Activities associated with marketing financial analysis functions For each of the four functional areas where financial analysis is useful in marketing. close a Dairy Board depot or increase the sales fleet · move into a new market or markets http://www.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] . brand or component of the business.Introduction to accounting for marketers Financial analysis can be used to serve many purposes in an organisation but in the area of marketing it has four main functions: a) to gauge how well marketing strategy is working (situation analysis) b) to evaluate marketing decision alternatives c) to develop plans for the future d) to control activities on a short term or-day to-day basis. there are a number of associated activities viz: a) Financial situation analysis (how well marketing strategy is working) This involves the study of: · the study of trends · comparative analysis · assessment of present financial strengths and limitations for the whole business..fao. e.org/docrep/W4343E/w4343e02. and is used for decisions whether to: · introduce new products/delete mature products · expand the sales force or do more advertising · delete a market operation e.g. In effect these four functions comprise what can be called the "Marketing Financial Analysis Circle" (see figure 1.g. b) Financial evaluation of alternatives This involves the study of a number of factors like the market place.

What is analysed in marketing financial analysis Two factors influence the choice of unit of analysis: a) the purpose of the analysis b) the cost of the information needed to perform the analysis.Introduction to accounting for marketers · build a new grain depot or silo. c) Financial planning · Sales and costs forecasts · Budgets · Proforma income statements. d) Financial control · Sales and costs forecasts · Actual results compared to budgets (analysis of variance) · Profit performance. d) Financial control (actual compared to planned results) This activity is mainly centered around keeping plans on course. profit projections · Return on investment · Return on capital employed · Sustainable growth rates.Chapter 1 . Some of these include the following: a) Financial situation analysis · Ratio analysis · Profit and contribution analysis · Sales and cost analysis.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .fao. c) Financial planning (projections concerning activities which marketing management has decided to undertake) Financial planning is used for a number of activities like: · the introduction of a new range of products · the forecasting of sales and costs · market liberalisation. cash flow analysis. b) Financial evaluation of alternatives · Sales and costs analysis · Break even analysis · Profit contribution. Methods involved in marketing financial analysis There are a variety of methods used in each of the four functional areas.org/docrep/W4343E/w4343e02. Several possible units can be used in marketing financial analysis and cost or sales data can http://www.

1 .product . can it pay its bills. marketing budgets and the marketing decisions. so this section serves as an introduction only. how is it financed and its "activities". i.g. its "leverage".htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .Chapter 1 . Liquidity analysis is drawn from the balance sheet. e.e. (i) Current ratio (should be greater than 1) 750/220=3.Alternative units in financial analysis Market Total Market Product/service Industry Organisation Company Segment/Division/Unit Marketing department Regions District/Branch Office/Store Sales person Market segment (s) Product mix Geographical areas Product line . Units can be chosen which suit the particular situation or organisation.size . the productivity and efficiency of the organisation. this has a bearing on new product planning. i. Use of ratios Ratios can be used to judge the organisation's "liquidity".Introduction to accounting for marketers be used. Table 1.430 Property and equipment 2.1.org/docrep/W4343E/w4343e02.500 1.41 ii) Quick ratio (minus stock) 550/220=2.150 Current Short term debt Long term debt Total liabilities $ 120 100 1.model . which is by no means exhaustive.brand . i.150 Total liabilities and net worth 3.50 http://www.shape Specific product Sales unit Basic financial analysis methods These will be expanded on in later chapters.e.000 Net worth Current and quick ratios These are used to judge a firm's short term capacity to meet its financial responsibilities.e.fao. Taking liquidity analysis only.demographics .characteristics .: $ Cash Accounts receivable Stock Total current assets Other assets Total assets 250 300 200 750 400 3.720 1. These units are listed in table 1.

it is the point where costs of production and sales volume are equal.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] . Profit analysis Breakeven analysis is a method used to estimate the number of units (volume) or sales value required to make neither profit or losses. Figure 1. Breakeven can be calculated by the formula or by graphical methods. if one wishes to recover all new investment (value) immediately it should be added to fixed cost.org/docrep/W4343E/w4343e02. materials.000 Variable cost/Unit = $ 0.430=1. labour.930=0.2 shows an example of both.2 Formula and graphical solution for breakeven analysis i) Formula Price/Unit = Fixed costs = $ 1. Breakeven is calculated by the formula: By rearranging the formula breakeven costs or sales can be calculated.720/1.Chapter 1 .500/2.21 (Long Term Debt + Net Worth) 1.g. Sales and cost information are used to calculate the breakeven point.51 This ratio shows the extent of leverage (debt) in total capitalisation. Without getting into the argument as to what constitutes fixed or variable costs.fao. fixed costs are defined as those which do not vary with output e. Note that profit level intentions should be added to the fixed costs as this is a "charge" to the company. In other words. Breakeven assumes fixed costs are constant. with a higher or lower price. Figure 1. rent.Introduction to accounting for marketers Debt ratios These are used to measure long term liquidity (Current Liability + Short Term Debt + Long Term debt) should be >1 1.767 = 65.846 $70. Also.g. rates. whereas variable costs do vary with increased or decreased output. variable costs vary at a constant rate and there is only one selling price. the breakeven point will be lower or higher respectively. However. 000 http://www. 000 units (volume) or $120. e.

fao.). If the product is dropped. suppose a product is generating a positive contribution margin. 000 of product net income would be lost.Chapter 1 .3. the remaining products would have to cover fixed costs that are not directly traceable to it.Introduction to accounting for marketers Figure 1. which is useful to gauge company and business unit financial performance and to budget for future operations. If the product was retained the $50. Figure 1. 000 could be used to contribute to other fixed costs and/or net income (see figure 1. market segments and other marketing. an examination of the profit contribution generated by a unit is often very useful to management.3 Illustrative contribution margin for product X (000's) $ SALES LESS: Variable manufacturing costs 500 200 200 150 50 Other variable costs traceable to product X 100 EQUALS: Contribution margin LESS: Fixed cost traceable to product X EQUALS: Product's net income http://www. Gross and net profit margins: Contribution margin is useful for examining the financial performance of products. For example. marketing executives should be familiar with the calculation of gross and net profit margins.2 Graphical solution Contribution analysis: When performance of products. market segments and other marketing units is being analysed. CONTRIBUTION = SALES (REVENUE) . contribution represents the amount of money available to cover fixed costs and the excess available is net income. planning and control units.VARIABLE COSTS So. However.4 gives an example Figure 1.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] . In the example below if X was eliminated. $50. The profit and loss statement is useful for reporting performance to stockholders and to compute taxes.org/docrep/W4343E/w4343e02.

fao.000 200.000 80.000 800. Dickel and Westcott (1987) $ Cost of goods sold Sales Stocks Cash Prepaid expenses Fixed assets 12.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .Introduction to accounting for marketers Note: Chapter 5 provides further explanations of a) and b). expenses 200.000 Selling and admin.200. have been developed to aid marketers see the effects on the "bottom line" of a change in an organisation. often computerised. Mason.Chapter 1 .600 Accounts receivable 3.500 3.000 Consider the following sample data taken from Rowe.200 Operating expenses 3.000 120.200 400 50 1. Figure 1. Figure 1.000 400. One such programme is the Dupont Analysis The model allows executives to input data into blank boxes and by manipulating any figure find the resulting outcome.750 Financial analysis models Many models. One of the advantages of computer based models is that one can work "backward" or "forward" through the model.000 16. setting desired levels of cost or outcomes and calculating the results.org/docrep/W4343E/w4343e02.5 Sample printout of the Dupont analysis http://www.4 Illustrative profit and loss statement $ SALES REVENUE LESS EQUALS: LESS: EQUALS: LESS: EQUALS: Cost of goods sold Gross profit margin Net profit before tax Tax Net profit 1.

B. annual revision of 5 year pro forma profit and loss statement (expense detail for broad categories). market research expense. these include productivity measures. current year budget/quarter. last year actual/quarter. distribution expense (trade and administration). say. a) Marketing budgets Field sales expense. http://www.org/docrep/W4343E/w4343e02. advertising expense.Introduction to accounting for marketers Other performance measures Various other performance measures can be used. next year pro forma/quarter. for a supermarket would be: Other measures include inventory turnover: Budgeting and forecasting These two activities are essential to marketing planning and are often done via pro forma statements. N. b) Pro forma financial statement Annual profit and loss statement.Chapter 1 .fao. In all figures watch for inflation and information gaps (use approximation). consumer). which. promotion expense (trade. product development expense.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .

00 33350.00 Don Davis 4585.00 30875.00 Chris Cooke 5625.fao. Into these cells may be entered numbers.00 8200.00 10500.THEN.00 8500.6 A sample spreadsheet A 1 2 3 4 5 6 7 8 9 10 Total 11 12 Commission 1.50 129.25 112. Key terms Budgeting and forecasting Contribution analysis Dupont analysis model Financial control http://www. The power of these systems is that the data held in any one cell can be made dependent on that held in other cells and changing a value in one cell can set (if wanted) a chain reaction of changes through other related cells.25 463. Simply entering a new value in the commission rate cell will lead to the automatic re-calculation of all dependent cells.00 9500.50 108...org/docrep/W4343E/w4343e02..00 31575.5%. Spreadsheets are powerful personal decision support tools..50 123.00 5000.00 Salesman 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total B C D E F Quarterly sales figures Note: The formatting of the 'cells' to display numerical fields to two decimal places/values for commission in the lower half are found by multiplying the sales figures by 1. A term often used to describe spreadsheets is "what if software".00 7200.00 6500.6 shows an example of a spreadsheet used in accounting. In addition. programming facilities such as IF.50 142.00 Alan Adams 5600. Figure 1.00 8750.38 142.13 473.00 8250.00 6500.75 18 Chris Cooke 84.ELSE greatly extend the control that may be built into the model.15 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total 21060.50 123.00 25810.00 Brian Brown 5250.00 17 Brian Brown 78. totals are stored as the SUM (column or row).63 387.88 127.50 157.78 131.00 7500.38 19 Don Davis 68.00 9500. This means that a model can be built in which the effect of changing key parameters may be observed. It can be used. for example. to evaluate the effect of changing the sales commission rate.Chapter 1 . Spreadsheets use the memory of a computer as if it were a large piece of paper divided up into a matrix of cells. Figure 1.00 8625.00 112. the borders showing column letters and row numbers may be omitted.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .5% 13 14 Salesman 15 16 Alan Adams 84.Introduction to accounting for marketers Spreadsheets Spreadsheets are often used in budgeting and forecasting exercises. text and formulae.75 97.

Chapter 1 .org/docrep/W4343E/w4343e02.htm#chapter 1 introduction to accounting for marketers[23/12/2012 16:38:13] .Introduction to accounting for marketers Financial evaluation of alternatives Financial planning Financial situation analysis Gross and net profit margins Marketing financial analysis circle Profit analysis Ratio analysis Spreadsheets http://www.fao.

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