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Marketing Finance

By: EconomyWatch Date: 30 June 2010

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Marketing finance is a challenging area, with issues in properly collating, calculating and analyzing the data, and many KPIs, metrics and measurements involved.

Marketing Finance Challenges

Revenue attribution challenges
Cost allocation strategies, variable costs, fixed costs and shared costs
Building an investment case using Net Present Value (NPV)
Return on Investment (ROI) and Return on Marketing Investment (ROMI)
Metrics Covered: ROI, ROMI, Economic Value Added (EVA), NPV, Revenue, Net Profit, Payback, Margin, Variable Cost, Fixed Cost
COGS - Cost of Goods Sold
- Cost of manufacturing or buying a product
- Third party costs directly attributable to an order
- Cost of services harder to determine but may be estimated using timesheets & loaded costs
- For example, in Retainers
- Most COGS costs are Variable Costs
Metrics: Gross Profit, Gross Margin

The Question:

What is my profit after paying for the goods I sell

Approach:

Calculate the COGS (Cost of Goods Sold ) & deduct from Revenues

Commentary:

The classic form of British Empire accounting, used by merchants to calculate the margin they make after they buy goods at wholesale or discounted price & sell at a retail marked or up priceThe Formula

Gross Profit = Revenue - Cost of Goods Sold (COGS)

Gross Margin = (Revenue - Cost of Goods Sold)/ Revenue

SG&A - Sales, General & Administrative Expenses
- Shared costs that can't be attributed to a specific product or client. Sometimes called Cost of Business
- SG&A costs include: Wages, Rent, Utilities, IT & Telecoms, Office supplies, Brand advertising, Non-attributable promotional costs, Non-dedicated staff costs, Transport & entertainment, Training, Etc
- Most SG&A costs are Fixed Costs
  Metrics: Operating Profit or Earnings Before Interest & Taxes (EBIT)
  
  The Question:
  
  What is my profit from the companies operations
  
  Approach:
  
  Take revenues, both COGS and SG&A (Sales, General & Administrative) expenses
  
  Commentary:
  
  This formula includes both costs that can be attributable to products or services sold and general expenses such as staff, overheads & brand advertising, but not cost of capital or taxes
  
  The Formula:
  
  Gross Profit = Revenue - (COGS) - Sales General & Admin (SG&A)
  
  Gross Margin = (Revenue - COGS - SG&A)/ Revenue
  
  ABC - Activity-Based Costing
  
  Using timesheet systems, project resource tracking or allocation methodologies, we can determine how much of our fixed costs are dedicated to particular products, clients or lines of business
  
  We can use this approach to bring SG&A costs into COGS - or think of Fixed Costs as Variable Costs
  
  If we want to really get a full view on marketing profitability, then we need ABC or some similar approach
  
  How do you calculate your Marketing Financials?
  
  What COGs expenses do you normally work with?
  
  What SG&A expenses do you normally work with?
  
  Are there cost 'issues' or 'unknowns' that you constantly grapple with?
  
  Do you have a standard cost accounting structure in place, such as ABC?
  
  Do you have ad hoc ways that you can suitably account for costs? Can you think of new/ better/ quicker ways?